Do real exchange rates in small Central and Eastern European economies obey purchasing power parity?
by Jani Bekő; Alenka Kavkler
International Journal of Sustainable Economy (IJSE), Vol. 11, No. 2, 2019

Abstract: This study contributes to the purchasing power parity (PPP) literature in two ways. First, in order to circumvent the pitfalls of linear specifications in testing the behaviour of exchange rates, we apply a nonlinear unit root test based on the exponential smooth transition autoregressive model. Second, we test the PPP theory for a class of ten Central Eastern European economies comprising the period from January 2001 to December 2016. The results of unit root tests imply that the null hypothesis of non-stationarity of real exchange rates cannot be rejected for the whole period. Our fragmentary evidence on PPP is reduced to individual subsamples for a small number of Central Eastern European countries. The weak evidence on PPP, found in this study, suggests that the process of real integration of Central and Eastern European economies and the subsequent price convergence among European markets remains incomplete.

Online publication date: Fri, 12-Apr-2019

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