Purchasing Power Parity and the European single currency: Some new evidence

Abstract

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Is the PPP valid for the EA-11 countries? New evidence from nonlinear unit root tests

“…In other words, even after considering the trend element and estimating the nonlinear adjustment of euro area economies' real exchange rates by an ESTAR model, the PPP hypothesis could not be confirmed for any of the countries in the sample, irrespective of the chosen base currency. Our empirical outcomes reported here are in line with the findings of Christidou and Panagiotidis (2010), Lin (2011), andHuang andYang (2015). However, instead of applying Pesaran's (2007) unit root test on 11 eurozone countries, as the studies of Lin (2011), andHuang andYang (2015) did, or testing only for a single benchmark currency (Christidou & Panagiotidis, 2010), in this paper, we carried out the KSS unit root test procedure on USD-based and JPY-based series.…”

“…In their cases of PPP evidence for countries in the euro area, the adjustment of real exchange rates frequently obeys nonlinear dynamics. Furthermore, Christidou and Panagiotidis (2010) could not find support for the PPP hypothesis for the original members of the Eurozone, neither in the complete span of 1973-2009 nor in the subperiod after the introduction of the single European currency. This finding is additionally corroborated by Wu and Lin (2011) and by Huang and Yang (2015).…”

“…The aim of this paper is to implement, in addition to the conventional augmented DickeyFuller (ADF) test, the Kapetanios et al (2003) (hereafter KSS) unit root test that accounts for possible nonlinear adjustment of real exchange rates for 11 countries of the euro area (EA-11). The empirical literature on the PPP theory for the original euro area economies is rather limited, while the results of explicit tests are surprisingly mixed (Chang, Chang, & Su, 2013;Christidou & Panagiotidis, 2010;Wu & Lin, 2011;Zhou & Kutan, 2011). From the perspective of European integration processes it is especially intriguing to observe their effects on the stationarity characteristics of real exchange rates and on the overall price convergence in this region.…”

Unit-Root and Stationarity Testing with Empirical Application on Industrial Production of CEE-4 Countries

“…We were unable to reject the unit-root hypothesis. In case of a unit-root process, one would 16 As an example, consider the DF-GLS test, where the distribution of τ generated from the ARMA model is left of the distribution of τ of the ARIMA model. For the convenience let`s denote (Table 6, for Hungary) indicates that conditionally on the estimated ARIMA(p,d,q) model, the probability of obtaining a DF-GLS statistics τ smaller than η sample is 0.374.…”

Purchasing Power Parity: A Unit Root, Cointegration and VAR Analysis in Emerging and Advanced Countries

“…This particular notion of the degree of mean reversion in real exchange rates plays an important role in the ongoing debate about the ability of macroeconomic models to account for the time series behavior of the real exchange rate. The half-life, according to Christidou and Panagiotidis (2010) can be calculated as follows:…”