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Testing the Purchasing Power Parity: Evidence from the New EU Countries

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  • Minoas Koukouritakis

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Abstract

This article examines the validity of the purchasing power parity (PPP) between each of the 12 new EU countries vis-a-vis the Eurozone. Using the Johansen cointegration methodology for a period that begins from the mid-1990s and allowing for a structural break for the countries that joined the EU on May 2004, it is found that there is a long-run equilibrium relationship among the nominal exchange rate, the domestic prices and the foreign prices, for all the new EU countries. The evidence also suggests that the PPP vector enters the cointegration space for Bulgaria, Cyprus, Romania and Slovenia, which means that only for these countries the long-run PPP vis-a-vis the Eurozone is verified. For the rest of the new EU countries the long-run PPP is violated, may due to the fact that the currencies of these countries have been pegged to the euro and cannot reflect the inflation differences vis-a-vis the Eurozone.
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Suggested Citation

  • Minoas Koukouritakis, 2007. "Testing the Purchasing Power Parity: Evidence from the New EU Countries," Working Papers 0720, University of Crete, Department of Economics.
  • Handle: RePEc:crt:wpaper:0720
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    File URL: http://economics.soc.uoc.gr/wpa/docs/0720.pdf
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    References listed on IDEAS

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    1. Lothian, James R. & Taylor, Mark P., 2000. "Purchasing power parity over two centuries: strengthening the case for real exchange rate stability: A reply to Cuddington and Liang," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 759-764, October.
    2. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
    3. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
    4. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
    5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    6. Ebru Guven Solakoglu, 2006. "Testing purchasing power parity hypothesis for transition economies," Applied Financial Economics, Taylor & Francis Journals, vol. 16(7), pages 561-568.
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    Citations

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    Cited by:

    1. Zorica Mladenović & Kosta Josifidis & Slađana Srdić, 2013. "The Purchasing Power Parity in Emerging Europe: Empirical Results Based on Two-Break Analysis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(2), pages 179-202, April.
    2. Nicolae Ghiba, 2011. "Purchasing Power Parity Influence On Real Exchange Rate Behavior In Romania," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3(4), pages 524-536, December.
    3. Niklas Ahlgren & Mikael Juselius, 2012. "Tests for cointegration rank and the initial condition," Empirical Economics, Springer, vol. 42(3), pages 667-691, June.
    4. repec:jes:wpaper:y:2011:v:3:p:524-536 is not listed on IDEAS
    5. Oguz OCAL, 2013. "Purchasing Power Parity in the Case of Romania: Evidence from Structural Breaks," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 973-976.
    6. Chang, Tsangyao & Tzeng, Han-Wen, 2011. "Long-run purchasing power parity with asymmetric adjustment: Further evidence from nine transition countries," Economic Modelling, Elsevier, vol. 28(3), pages 1383-1391, May.
    7. Chang, Tsangyao & Chiu, Chi Chen & Tzeng, Han Wen, 2011. "Revisiting Purchasing Power Parity for Nine Transition Countries Using the Rank Test for Nonlinear Cointegration," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 19-30, June.
    8. Ali Acaravci & Ilhan Ozturk, 2010. "Testing Purchasing Power Parity in Transition Countries: Evidence from Structural Breaks," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 12(27), pages 190-198, February.
    9. Václav Žďárek, 2012. "An Empirical Investigation of the Purchasing Power Parity Hypothesis in European Transition Countries," Prague Economic Papers, University of Economics, Prague, vol. 2012(3), pages 257-276.

    More about this item

    Keywords

    Purchasing Power Parity; EU Enlargement; Cointegration; Structural Break; Symmetry and Proportionality;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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