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

Abstract

This study applies quantile unit root test proposed by Koenker and Xiao (J Am Stat Assoc 99 (467): [775][776][777][778][779][780][781][782][783][784][785][786][787] 2004) and Galvao (J Econom 152:165-178, 2009) to revisit the purchasing power parity in 7 transition countries:

Does the PPP condition hold for oil‐exporting countries? A quantile cointegration regression approach

“…Therefore, under normal conditions, PPP is unrealistic, and only in the presence of extreme negative shocks may it hold. These results confirm the aforementioned policy implications outlined by Bahmani‐Oskooee et al ().…”

“…On the basis of the Jarque‐Bera test results that show all of the 12 countries can not be described as having a normal distribution, the quantile unit root tests will be better suited to the asymmetric distribution. Previous papers using this methodology, Bahmani‐Oskooee et al (), find that the quantile unit root tests reject the null hypothesis of a unit root where the traditional tests did not. It is therefore useful to make the comparison in order to justify the quantile approach.…”

“…The interpretation of this is that negative shocks induce mean reversion, and thus only have temporary effects, whereas positive shocks are persistent and dictate the long‐run path of the process. Bahmani‐Oskooee et al () highlight the policy implications of these findings, stating that the best time to improve their trade balance would be when they have experienced a positive shock due to its persistence. In this case, we would expect to find a unit root in the upper quantiles and reject the unit root hypothesis in the lower quantiles.…”

“…Bahmani‐Oskooee and Ranjbar () find support in 16 of 23 countries of the Organization for Economic Cooperation and Development (OECD); having previously only found support in six countries using traditional unit root tests. Focusing on less developed, transition countries, Bahmani‐Oskooee et al () found support of PPP for all seven countries; having previously only found support in one country. As yet however, this methodology has not been extended to oil‐exporting countries.…”

“…The quantile methodology, based on the quantile autoregressive model and quantile unit roots by Koenker and Xiao (), (), has been recently employed in the context of PPP successfully by Nikolaou (), Bahmani‐Oskooee and Ranjbar (), and Bahmani‐Oskooee et al (). As noted by Hosseinkouchack and Wolters (), there are a number of advantages to this approach.…”