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

Maria Christidou (mchristidou@gmail.com) and Theodore Panagiotidis
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Maria Christidou: University Of Macedonia

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

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.

Keywords: Purchasing Power Parity; half-life; nonlinear unit roots; panel unit roots; heterogeneity; cross-section dependence (search for similar items in EconPapers)
JEL-codes: F3 F31 G15 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2010-06
New Economics Papers: this item is included in nep-eec and nep-opm
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Citations: View citations in EconPapers (24)

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Related works:
Journal Article: Purchasing Power Parity and the European single currency: Some new evidence (2010)
Working Paper: Purchasing Power Parity and the European Single Currency: Some New Evidence (2010)
Working Paper: Purchasing Power Parity and the European Single Currency: Some New Evidence (2010)
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