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Purchasing Power Parity Before And After The Adoption Of The Euro

Su Zhou, Mohsen Bahmani-Oskooee () and Aali Kutan
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Su Zhou: University of Texas at San Antonio
Aali Kutan: Southern Illinois University Edwardsville and the Center for eurpean Integration Studies (ZEI)

No 31, Working Papers from College of Business, University of Texas at San Antonio

Abstract: This paper examines the purchasing power parity (PPP) hypothesis for the post-Bretton Woods era including the period after the introduction of the euro. The study applies a new nonlinear unit root test to the bilateral real exchange rates of both European and other industrial countries with the French franc and German mark (and the euro after 1998), as well as the US dollar as numeraire currencies. The results of the study provide stronger support for PPP than any earlier studies of bilateral PPP for industrial countries and suggest that (1) PPP tends to hold well within the European Union (EU) even before the adoption of the euro, (2) the evidence for PPP becomes more significant for both EU and non-EU countries when the sample period is extended to the euro era, and (3) convergence toward PPP between the EU countries, especially between the euro-area countries, tends to be nonlinear, while it is likely to be linear for the non-EU industrial countries

Keywords: purchasing power parity; nonlinear stationarity; real exchange rates; single currency area (search for similar items in EconPapers)
JEL-codes: F31 F33 G15 C22 (search for similar items in EconPapers)
Date: 2008-01-15
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