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Testing for price convergence: how close are EU New Member's States to euro zone?

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  • Iuliana Matei

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

The purpose of my paper is to empirically explore the validity of the relative version of purchasing power parity (PPP) for nine EU New Member States (NMS) using unit root and panel unit root frameworks. Three periods are considered: the period before NMS joined the EU (1995:01-2004:04), the period after NMS joined the EU (2004:05- 2008:12), and the sum of the two periods (1995-2008). We find evidence that real exchange rates follow generally unit-root processes implying that PPP doesn't hold even as a long-run relationship. In addition, results show that price co-movements increase strongly after NMS joined the EU.

Suggested Citation

  • Iuliana Matei, 2009. "Testing for price convergence: how close are EU New Member's States to euro zone?," Post-Print halshs-00515126, HAL.
    • Handle: RePEc:hal:journl:halshs-00515126
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    References listed on IDEAS

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    1. Taylor, Alan M, 2001. "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," Econometrica, Econometric Society, vol. 69(2), pages 473-498, March.
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    More about this item

    Keywords

    New European Member States; Price convergence; Unit root and panel unit root models; Purchasing Power Parity (PPP); New European Member States.;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E0 - Macroeconomics and Monetary Economics - - General

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