Testing the Theory of Purchasing Power Parity for Slovenia and Hungary

Darja BorÅ¡;iÄ and Jani BekÅ

Eastern European Economics, 2006, vol. 44, issue 4, 82-96

Abstract: This paper checks the validity of the theory of purchasing power parity for Slovenia and Hungary, compared to Austria, Germany, France, and Italy, by employing data from January 1992 to December 2001. Results of unit root tests indicate that only the real exchange rate of the Hungarian forint to the Italian lira is stationary. Although some cointegration was found among nominal exchange rates and selected consumer price indexes, the theory of PPP could not be confirmed. The empirical work completed so far reveals that the underlying cause of real exchange rate appreciation in both transition countries stems from differences in relative productivity gains and steady price increases due to insufficient competition in the nontradable sector.

Date: 2006
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