Revisiting Purchasing Power Parity for Central and East European Countries

Chi-Wei Su and Hsu-Ling Chang

Eastern European Economics, 2011, vol. 49, issue 1, 5-12

Abstract: This study applies nonlinear cointegration to assess exchange rates with the corresponding relative prices and aggregate price levels for seven Central and East European countries (CEECs). We find that nonparametric rank testing procedures have higher power than parametric testing procedures, as suggested by Breitung (2001), if the true data-generating process of exchange rate is in fact a stationary nonlinear process. We reexamine the validity of purchasing power parity (PPP) from the nonparametric nonlinear point of view and provide robust evidence clearly indicating that PPP holds true for these countries. Hence, the long-run CEEC exchange rate adjustments are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis from a nonlinear viewpoint.

Date: 2011
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