Prague Economic Papers 2012, 21(3):257-276 | DOI: 10.18267/j.pep.423

An Empirical Investigation of the Purchasing Power Parity Hypothesis in European Transition Countries

Václav ®ïárek
University of Economics, Department of Monetary Theory and Policy, W. Churchill Sq. 3, 130 67 Prague 3 (zdarekv@vse.cz).

The article is aimed at empirical investigation of the relative version of the purchasing power parity (PPP). It attempts to shed some light on the so-called 'PPP puzzle' for selected countries in the CEE region and Turkey. Because of ambiguous results in the literature, various econometrics methods are employed: univariate tests (URTs: ADF, PP, KPSS, DF-GLS), robust URTs including nonlinear URTs (Kapetanios and Sollis' and Bierens' test) and tests allowing for (multiple) structural breaks (Perron, Lee and Strazicich). The euro currency pairs (bilateral) of 10 European transition countries covering the period 1995:1-2011:1 are utilized. Our results for conventional linear (such as ADF or PP test) do not provide a crystal-clear answer, more robust URTs at least partially do, once the source of nonlinearities has been controlled for (structural changes, non-zero adjustment costs). Nonlinear tests with structural breaks provide more convincing evidence in favour of the PPP hypothesis including asymmetrical effects of exchange rate adjustments.

Keywords: transition countries, unit root, real exchange rates, exponential smooth transition autoregressive model
JEL classification: E51, F21

Published: January 1, 2012  Show citation

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®ïárek, V. (2012). An Empirical Investigation of the Purchasing Power Parity Hypothesis in European Transition Countries. Prague Economic Papers, 21(3), 257-276. doi: 10.18267/j.pep.423
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