Testing the long-run validity of purchasing power parity for Eastern and Southern Europe Countries

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2013
Neslihan, Can
This study examines the long-run validity of the Purchasing Power Parity, namely stationarity of real exchange rates for six Eastern and Southern Europe countries over the period of January 1994- December 2012. Despite extensive research to date, the empirical evidence on the PPP hypothesis remains inconclusive. A number of very recent studies ascribe this to the low power of the standard unit root tests in identifying stationarity of potentially nonlinear real exchange rates. In this sense, this study employs the threshold unit root test developed by Caner and Hansen (2001), which allows for a simultaneous search for non-linearity and non-stationarity. The empirical results reveal strong evidences of non-linearity for all of the real exchange rate series. Moreover, it is observed that PPP holds for all countries with the exceptions being Albania and Macedonia. More specifically, the real exchange rates of Croatia, Moldova, Serbia and Ukraine are characterized by local non-stationarity, that is, PPP holds in one threshold regime, but not in another

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Citation Formats
C. Neslihan, “Testing the long-run validity of purchasing power parity for Eastern and Southern Europe Countries,” M.S. - Master of Science, Middle East Technical University, 2013.