Revisiting purchasing power parity for nine transition countries: a Fourier stationary test

Abstract

This study applies the stationarity test with a Fourier function proposed by Becker et al. to test the validity of long-run purchasing power parity (PPP) in a sample of transition countries from January 1995 to December 2008. The empirical results indicate that PPP does not hold for most of the transition countries studied, with the exception of Lithuania. Our results have important policy implications for these transition countries.

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

“…Determining the behavior of exchange rates in such countries would provide information not only to policy makers in developing sound exchange rate and monetary policies but also to traders and global investors in their trade and investment strategies. Even though a number of studies have tested the PPP hypothesis in the transition economies (see, among others, Baharumshah and Borsic 2008;Lin et al 2011;Solakoglu 2006;Cuestas 2009;Telatar and Hasanov 2009), this study differs from those studies by applying the quantile-based unit root tests for the first time. The remainder of this paper is organized as follows.…”

“…This means real exchange rate will be a mean-reverting process-stationary in the long run. In particular, a non-stationary real exchange rate indicates that there is no long-run relationship between nominal exchange rate and domestic and foreign prices, thereby invalidating the PPP hypothesis (Lin et al 2011). As such, PPP cannot be used to determine the equilibrium exchange rate, and an invalid PPP also disqualifies the monetary approach to exchange rate determination, which requires PPP to hold true.…”

Purchasing power parity in belt and road initiative countries relative to China

“…This might be explained by the following reasons. First, some SREB countries apply a planned economy system and thus produce a negative influence on themselves such as price control, which destroys the basis of PPP (Lin et al 2011). Second, the bilateral trade volume between SREB and China is less than that in MSR.…”

The Validity of Purchasing Power Parity in Central and Eastern European Countries: A Rolling Nonlinear Unit Root Test

“…To overcome this problem, Lin et al (2011) and Chang et al (2012) employed Fourier stationary and Fourier unit root tests. Lin et al (2011) found that out of the nine transition countries studied in the 1995M1-2008M12 period PPP was only valid for Lithuania by employing the Fourier stationary test introduced by Becker et al (2006).…”

“…To overcome this problem, Lin et al (2011) and Chang et al (2012) employed Fourier stationary and Fourier unit root tests. Lin et al (2011) found that out of the nine transition countries studied in the 1995M1-2008M12 period PPP was only valid for Lithuania by employing the Fourier stationary test introduced by Becker et al (2006). On the other hand, by employing the Fourier LM unit root test developed by Enders and Lee (2012), Chang et al (2012) tested the validity of the PPP hypothesis for seven CEE countries using the monthly data from 1993 to 2008 and obtained the result that PPP was valid for all seven countries.…”