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Re-examining long-run purchasing power parity for Central and Eastern European countries: nonlinear panel unit root tests

Author

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  • Hsu-Ling Chang
  • Chi-Wei Su
  • Meng-Nan Zhu
  • Pei Liu

Abstract

This study applies nonlinear panel unit root test to assess the nonstationary properties of the real exchange rate for seven Central and Eastern European countries (CEEC). We find that nonlinear panel unit root test has higher power than linear method suggested by Breuer et al. (2001) if the true data-generating process of exchange rate is in fact a stationary nonlinear process. We re-examine the validity of Purchasing Power Parity (PPP) from the panel nonlinear point of view and provide robust evidence that clearly indicates that PPP holds true for five countries, namely, Bulgaria, Hungary, Poland, Romania and Russia. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a nonlinear way.

Suggested Citation

  • Hsu-Ling Chang & Chi-Wei Su & Meng-Nan Zhu & Pei Liu, 2011. "Re-examining long-run purchasing power parity for Central and Eastern European countries: nonlinear panel unit root tests," Applied Economics Letters, Taylor & Francis Journals, vol. 18(5), pages 411-415.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:5:p:411-415
    DOI: 10.1080/13504851003724218
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    1. James R. Lothian & Mark P. Taylor, 2008. "Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod‐Balassa‐Samuelson Effect?," Economic Journal, Royal Economic Society, vol. 118(532), pages 1742-1763, October.
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    Cited by:

    1. Oguz OCAL, 2013. "Purchasing Power Parity in the Case of Romania: Evidence from Structural Breaks," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 973-976.
    2. Habimana, Olivier, 2016. "Asymmetric nonlinear mean reversion in real effective exchange rates: A Fisher-type panel unit root test applied to Sub-Saharan Africa," The Journal of Economic Asymmetries, Elsevier, vol. 14(PB), pages 189-198.
    3. Andreea-Daniela GANGONE & Mariana-Cristina GANESCU & Mihaela ASANDEI, 2018. "An Analysis Of The Effect Of Purchasing Power Parity On National Competitiveness And Human Development In 21 European Countries," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 3(1), pages 152-165.

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