Purchasing Power Parity in Nine Transition Countries: Panel Surkss Test

Abstract

This study applies Panel Seemingly Unrelated Regressions Kapetanios et al. (SURKSS) tests, proposed by Wu and Lee (2009), to investigate the properties of long-run purchasing power parity (PPP) in nine transition countries over the period of January 1995 to December 2008. The empirical results from the univariate unit-root and panel-based unit-root tests indicate that PPP does not hold for these nine countries under study. However, Panel SURKSS tests indicate that PPP is valid for only two of these nine countries. As concerns major policy, our study implies that PPP can be used to determine the equilibrium exchange rate for both Estonia and Hungary, two countries under study. Our 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. Copyright

Revisiting purchasing power parity in Eastern European countries: quantile unit root tests

“…KPSS test get similar results. These results are consistent with those of Baharumshah and Borsic (2008), Liu et al (2012), Chang and Tzeng (2013), and Bahmani-Oskoee et al (2015), indicating that PPP does not hold in most transition countries. As mentioned before, due to deficiencies associated with conventional unit root tests, we now consider the quantile unit root of Koenker and Xiao (2004) first.…”

“…Empirical evidence on the stationarity of real exchange rates is abundant but inconclusive thus far. Previous studies by MacDonald and Taylor (1992), Taylor (1995), Taylor (2006), Peel and Venetis (2003), Lothian and Taylor (2000), Sarno and Taylor (2002), Taylor and Taylor (2004), Sjolander (2007), Bahmani-Oskooee et al (2008), Bahmani-Oskooee and Hegerty (2009), Chang and Tzeng (2013), He and Chang (2013), He et al (2014) and Bahmani-Oskooee et al (2014)have provided in-depth information on its theoretical and empirical aspects. However, the above tests usually focus on the average behavior of real exchange rate without considering the influence of various sizes of shocks on real exchange rate.…”