RELATIVE PURCHASING POWER PARITY AND THE EUROPEAN MONETARY UNION: EVIDENCE FROM EASTERN EUROPE

Jon H. Findreng

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

Abstract

This paper examine whether relative purchasing power parity holds for Albania, Bulgaria, Croatia, FYR Macedonia, Romania and Turkey versus Germany over the period January 1999 to May 2013.We investigate the real exchange rate by using a Dickey-Fuller test.Thereafter, we investigate the real exchange rate by allowing for a trend with the origin in the Balassa-Samuelson effect.We also investigate the same pairs using the Engle-Granger cointegration test.However, for the Engle-Granger cointegration test, four of the pairs are excluded as the nominal exchange rate and the price differential are not integrated by the same order.We have investigated the half-life of each pair in each of the three approaches.We find ambiguous results both regarding relative PPP and the speed of adjustment towards the PPP equilibrium.We use the results to investigate whether the Albanian, Bulgarian, Croatian, FYR Macedonian, Romanian and Turkish economies are synchronized with the German economy and if they are ready to enter the European Monetary Union.

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References

1964The Purchasing-Power Parity Doctrine: A Reappraisal 1996The Purchasing Power Parity Puzzle 1964Theoretical Notes on Trade Problems 1994Perspectives on PPP and Long-Run Real Exchange Rates 1978Purchasing power parity 1985International Capital Mobility and Crowding Out in the U.S. Economy: Imperfect Integration of Financial Markets or of Goods Markets?2003The Balassa–Samuelson effect in Central and Eastern Europe: myth or reality?2005Adopting the Euro in Central Europe: Challenges of the Next Step in European Integration

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