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Purchasing Power Parity and the European Single Currency: Some New Evidence

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  • Maria Christidou

    (Department Of Economics, University Of Macedonia, Thessaloniki, Greece)

  • Theodore Panagiotidis

    (Department Of Economics, University Of Macedonia, Thessaloniki, Greece; The Rimini Centre for Economic Analysis (RCEA), Italy)

Abstract

The effect of the single currency on the Purchasing Power Parity (PPP) hypothesis is examined in this study for the 15 EU countries, vis a vis the US dollar, before and after the advent of the euro. Standard as well as nonlinear unit root tests are employed on the time series dimension. Unit root tests reject PPP and the highest half-lives are observed after the introduction of the single currency. Panel unit root (Pesaran, 2007) and stationarity tests (Hadri and Kurozumi, 2008) that take into account cross-sectional dependence are also estimated. The results remain inconclusive as panel stationarity tests fail to support PPP whereas panel unit root tests fail to reject PPP for the whole sample and for the period before the introduction of the single currency.

Suggested Citation

  • Maria Christidou & Theodore Panagiotidis, 2010. "Purchasing Power Parity and the European Single Currency: Some New Evidence," Working Paper series 19_10, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:19_10
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    References listed on IDEAS

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    Cited by:

    1. Cuestas, Juan Carlos & Monfort, Mercedes & Ordóñez, Javier, 2024. "Have real exchange rates and competitiveness in Central and Eastern Europe fundamentally changed?," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 618-628.
    2. Václav Žďárek, 2012. "An Empirical Investigation of the Purchasing Power Parity Hypothesis in European Transition Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2012(3), pages 257-276.
    3. Lyócsa, Štefan & Výrost, Tomáš & Baumöhl, Eduard, 2011. "Unit-root and stationarity testing with empirical application on industrial production of CEE-4 countries," MPRA Paper 29648, University Library of Munich, Germany.
    4. Hai Long Vo & Duc Hong Vo, 2023. "The purchasing power parity and exchange‐rate economics half a century on," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 446-479, April.
    5. Simeon Coleman & Juan Carlos Cuestas, 2024. "On the evolution of competitiveness in Central and Eastern Europe: Is it broken?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 2911-2926, July.
    6. Oladunjoye Opeyemi Nathaniel, 2019. "Validity of Purchasing Power Parity (PPP) Hypothesis in the Ecowas (1980–2017)," Emerging Economy Studies, International Management Institute, vol. 5(2), pages 141-156, November.
    7. Charfeddine, Lanouar & Kahia, Montassar, 2019. "Impact of renewable energy consumption and financial development on CO2 emissions and economic growth in the MENA region: A panel vector autoregressive (PVAR) analysis," Renewable Energy, Elsevier, vol. 139(C), pages 198-213.
    8. Yosra Saidi & Anis Ochi, 2023. "Estimating relationships among foreign direct investment, governance quality, and economic growth in developing countries using the threshold auto‐regressive model," Regional Science Policy & Practice, Wiley Blackwell, vol. 15(2), pages 403-424, April.
    9. Ahmad Zubaidi Baharumshah & Siew-Voon Soon, 2012. "Mean reversion in bilateral real exchange rates: evidence from the Malaysian ringgit," Applied Economics, Taylor & Francis Journals, vol. 44(22), pages 2921-2933, August.
    10. E. N. Gyamfi & E. F. Appiah, 2019. "Further evidence on the validity of purchasing power parity in selected African countries," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(2), pages 330-343, April.
    11. Nikolaos Giannellis & Minoas Koukouritakis, 2016. "Eurozone's Leader and its Followers: Are their Markets Integrated Enough?," Working Papers 1607, University of Crete, Department of Economics.
    12. Tsoulfidis, Lefteris & Tsaliki, Persefoni, 2011. "Classical competition and regulating capital: theory and empirical evidence," MPRA Paper 51334, University Library of Munich, Germany, revised 2013.
    13. Anis Ochi & Yosra Saidi & Mohamed Ali Labidi, 2023. "Non-linear Threshold Effect of Governance Quality on Economic Growth in African Countries: Evidence from Panel Smooth Transition Regression Approach," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(4), pages 4707-4729, December.
    14. Juan Carlos Cuestas & Mercedes Monfort & Javier Ordoñez, 2019. "Real exchange rates and competitiveness in Central and Eastern Europe: have they fundamentally changed?," Working Papers 2019/12, Economics Department, Universitat Jaume I, Castellón (Spain).
    15. Mücahit Aydın, 2019. "Investigation of the Validity of Purchasing Power Parity Hypothesis with Fourier Unit Root Tests: The Case of Turkey," EKOIST Journal of Econometrics and Statistics, Istanbul University, Faculty of Economics, vol. 30(0), pages 35-48, June.
    16. Mehmet DINÇ & Mustafa GÖMLEKSIZ2 & Özlem Gül DINÇ, 2022. "What Is New About the PPP Theory in the Nordic Countries? Evidence from Panel Unit Root Tests with Sharp Breaks and Gradual Shifts," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 165-186, April.
    17. Giannellis, Nikolaos & Koukouritakis, Minoas, 2017. "Competitiveness divergence in the Eurozone: The need for symmetric adjustment," Journal of Policy Modeling, Elsevier, vol. 39(5), pages 942-962.
    18. Georgios Loukopoulos & Dimitrios Antonopoulos, 2015. "Purchasing Power Parity: A Unit Root, Cointegration and VAR Analysis in Emerging and Advanced Countries," Business and Economic Research, Macrothink Institute, vol. 5(1), pages 262-279, June.
    19. Cuestas, Juan Carlos & Monfort, Mercedes & Ordóñez, Javier, 2024. "Gas price shocks, the current account, and the real exchange rate: An empirical analysis for the EU," Finance Research Letters, Elsevier, vol. 60(C).
    20. Huang, Chao-Hsi & Yang, Chih-Yuan, 2015. "European exchange rate regimes and purchasing power parity: An empirical study on eleven eurozone countries," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 100-109.
    21. Juan Carlos Cuestas, 2019. "Quantile regressions, asymmetric adjustment and crisis: the case of EU real exchange rates," Working Papers 2019/09, Economics Department, Universitat Jaume I, Castellón (Spain).
    22. Yosra Saidi & Anis Ochi & Samir Maktouf, 2023. "FDI inflows, economic growth, and governance quality trilogy in developing countries: A panel VAR analysis," Bulletin of Economic Research, Wiley Blackwell, vol. 75(2), pages 426-449, April.

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    More about this item

    Keywords

    Purchasing Power Parity; half-life; nonlinear unit roots; panel unit roots; heterogeneity; cross-section dependence;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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