Purchasing Power Parity in a Transition Country: The Case of Croatia

Marina Tkalec and Maruška Vizek

Comparative Economic Studies, 2011, vol. 53, issue 2, 223-238

Abstract: We explore the validity of the purchasing power parity (PPP) hypothesis in the case of Croatia. Two cointegration methods were used: Johansen cointegration that assumes symmetry and threshold cointegration that allows for asymmetric adjustment in the short run. The results suggest that in the long run the absolute power parity condition holds, that is, that the exchange rate is aligned with the fundamentals and no depreciation is needed. The error correction model does not confirm the existence of exchange rate pass-through to domestic consumer prices. Threshold cointegration results suggest that the adjustment of deviations from PPP is not asymmetric.

Date: 2011
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