Testing Purchasing Power Parity in Transition Countries: Evidence from Structural Breaks

Ali Acaravcı · İlhan Öztürk

28 citations0/0 files storedRePEc: Research Papers in Economics

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Global Financial Crisis and Policies

Abstract

This study examines the validity of the purchasing power parity (PPP) in 8 transition countries for monthly data from 1992:1 to 2009:1. While results from both the ADF unit root and the KPSS unit root test indicate that PPP does not hold for Bulgaria, Croatia, Czech Republic, Hungary, Macedonia (FYR), Poland, Romania and Slovak Republic. In the presence of structural breaks, PPP holds only for Bulgaria and Romania it does not hold for the other 6 transition countries. Testing the stationarity of real exchange rate series by using four types of unit roots tests, the evidence suggests that real effective exchange rate is nonstationary and thus PPP doesn’t hold for all 6 transition countries in the long run. All results emphasized that there is weak evidence about the long-run PPP hypothesis in transition countries and the validity of PPP remains a controversial and unsettled issue.

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References

1981Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root 1992Testing the null hypothesis of stationarity against the alternative of a unit root 2002Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis 2003Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks 1991Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?1995Unit Root Tests in ARMA Models with Data-Dependent Methods for the Selection of the Truncation Lag 1991Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots 1994Perspectives on PPP and Long-Run Real Exchange Rates

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2016Revisiting purchasing power parity in Eastern European countries: quantile unit root tests 2011Long-run purchasing power parity with asymmetric adjustment: Further evidence from nine transition countries 2011PURCHASING POWER PARITY IN NINE TRANSITION COUNTRIES: PANEL SURKSS TEST

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