Purchasing power parity and the euro area

Abstract

This paper analyzes purchasing power parity (PPP) for the euro area. We study the impact of the introduction of the euro in 1999 on the behavior of real exchange rates. We test the PPP hypothesis for a panel of real exchange rates within the euro area over the period 1973-2003. Our methodology exploits the cross-sectional dependence across real exchange rates and allows for heterogeneity in the rates of mean reversion. We present evidence in favor of PPP for the full panel of real exchange rates, but we show that accounting for cross-country differences within the euro area is essential. The unit root hypothesis can be rejected for some real exchange rates, but evidence for PPP is weak for others. We also investigate PPP between the "synthetic" euro against several other major currencies over the period 1979-2003. We find support for the PPP hypothesis for the full panel of real exchange rates. When the restriction of a common mean reversion coefficient is relaxed, we reject the unit root hypothesis for the euroSwiss franc rate only. We conclude that the process of economic integration in Europe has accelerated convergence toward PPP within the euro area. This paper analyzes purchasing power parity (PPP) for the euro area. We study the impact of the introduction of the euro in 1999 on the behavior of real exchange rates. We test the PPP hypothesis for a panel of real exchange rates within the euro area over the period 1973-2003. Our methodology exploits the cross-sectional dependence across real exchange rates and allows for heterogeneity in the rates of mean reversion. We present evidence in favor of PPP for the full panel of real exchange rates, but we show that accounting for cross-country differences within the euro area is essential. The unit root hypothesis can be rejected for some real exchange rates, but evidence for PPP is weak for others. We also investigate PPP between the "synthetic" euro against several other major currencies over the period 1979-2003. We find support for the PPP hypothesis for the full panel of real exchange rates. When the restriction of a common mean reversion coefficient is relaxed, we reject the unit root hypothesis for the euro-Swiss franc rate only. We conclude that the process of economic integration in Europe has accelerated convergence toward PPP within the euro area. 5001-6182 Business. H\ZRUGVEuropean integration, real exchange rates, purchasing power parity, heterogeneous SUR

Effect of Environmental Regulation Stringency on the Pulp and Paper Industry

“…The test rejects the null hypothesis of no correlation between the residuals. Further, the technique suggested by Koedijk [69] for computing the pairwise correlation between each group for the differenced series of the variables has also been performed on the dependent and independent variables. The correlation is higher than 0.5 between groups in the majority of variables, which gives a further indication that there is a non-negligible correlation amongst the countries.…”

The Existence of Long-Run PPP: A Comparison between Developed and Developing Countries

“…Using different method, Koedijk, Tims, & Dijk (2004) found supporting evidence to the hypothesis of PPP in advanced economies. Based on panel data studies and seemingly unrelated (SUR) estimator, their result suggest that there is a convergence process toward PPP within Euro area (with the exception of Switzerland) induced by the economic integration in Europe.…”

How much intraregional exchange rate variability could a currency union remove? The case of ASEAN+3

“…We start from the PPP-based VAR (Vector AutoRegression) model using a panel of BREER with respect to the partner foreign countries, e.g. see Koedijk et al (2004) the dynamic adjustment speeds of the domestic price and the foreign price in (4) and reformulate it into an error-correction model (ECM) using (1): (5) decomposes the dynamic movement of BREER into four types of shocks -short-run domestic inflation, short-run foreign inflation in combination with exchange rate variability, long-run disequilibrium due to PPP misalignment and a residual term. Notice also that the first three types of shocks are not only structurally interpretable but also relatively uncorrelated.…”