Original scientific paper
https://doi.org/10.1080/1331677X.2016.1189842
Is the PPP valid for the EA-11 countries? New evidence from nonlinear unit root tests
Alenka Kavkler
Darja Boršič
Jani Bekő
Abstract
In the empirical literature there is a prevalent view that real exchange
rates tend to converge towards levels predicted by the Purchasing
Power Parity (PPP) only in the long-run and that short-run deviations
from the PPP relationship are frequently sizable. The progressing
of European monetary integration and the forming of monetary
union spurred the interest of researchers to assess the relevance
of the PPP theory in the case of the single European currency. Our
paper therefore examines this exchange rate theory by testing a
dataset of monthly real exchange rates for a sample of 11 eurozone
members with respect to different benchmark currencies. Because
of the documented drawbacks of linear specifications in examining
this exchange rate theory, we utilise a nonlinear unit root test based
on the ESTAR model proposed by Kapetanios, Shin, and Snell (2003).
The results of unit root tests for the US dollar-based real exchange
rate series as well as for Japanese yen-based series suggest that the
PPP proposition does not hold in the case of eurozone countries. The
absence of real exchange rates’ nonlinear reversion reported in this
study thus confirms the thesis of Wu and Lin (2011) regarding the PPP
relationship since the inception of the euro.
Keywords
Purchasing power parity; nonlinear unit root test; eurozone countries
Hrčak ID:
171748
URI
Publication date:
22.12.2016.
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