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Revisiting purchasing power parity in Eastern European countries: quantile unit root tests

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Abstract

This study applies quantile unit root test proposed by Koenker and Xiao (J Am Stat Assoc 99(467):775–787, 2004) and Galvao (J Econom 152:165–178, 2009) to revisit the purchasing power parity in 7 transition countries: Bulgaria, Czech Republic, Hungary, Lithuania, Poland, Romania, and Russia over 1998M1 to 2015M3. While traditional unit root tests fail to reject unit root hypothesis, the two quantile unit root tests did reject unit root null hypothesis in all countries, providing support for the PPP and solving the PPP puzzle. The estimated half-life based on quantile autoregressive model is about 12–25 months (1–2 year).

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Notes

  1. The period prior to 1998 was eliminated from the analysis because changes in overall inflation during the early years of the transition process (especially appreciation of the real exchange rate) were dominated by firm-level restructuring involving massive lay-offs, the adjustment of distorted relative prices from the Communist era and pegged exchange rate regimes motivated by concerns for macroeconomic stabilization.

  2. Details about the selection of bandwidth, of kernel, and of truncation parameters, we follow the suggestion of Koenker and Xiao (2004) and Galvao (2009). Interested reader can refer to Koenker and Xiao (2004) and Galvao (2009).

  3. For more details, see Koenker and Xiao (2004) and Galvao (2009).

  4. Significant results in certain quantiles indicate asymmetric adjustment of real exchange rate process.

  5. Equation (9) is not only an extension of Enders and Holt (2012) but also a combination of Carrión-i-Silvestre et al. (2006) and Becker et al. (2006) tests.

  6. For details of how to estimate (11) and (12) refer to Bahmani-Oskooee et al. (2014), Bahmani-Oskoee et al. (2015).

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Authors and Affiliations

  1. The Center for Research on International Economics and Department of Economics, University of Wisconsin-Milwaukee, Milwaukee, WI, USA

    Mohsen Bahmani-Oskooee

  2. Department of Finance, Feng Chia University, Taichung, Taiwan

    Tsangyao Chang

  3. Department of Insurance, Chaoyang University of Technology, Taichung, Taiwan

    Tsung-Hsien Chen

  4. Department of Finance, Overseas Chinese University, Taichung, Taiwan

    Han-Wen Tzeng

Authors
  1. Mohsen Bahmani-Oskooee
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  2. Tsangyao Chang
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  3. Tsung-Hsien Chen
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  4. Han-Wen Tzeng
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Corresponding author

Correspondence to Mohsen Bahmani-Oskooee.

Additional information

Valuable comments of two anonymous referees are very much appreciated. Remaining errors, however, are our own.

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Bahmani-Oskooee, M., Chang, T., Chen, TH. et al. Revisiting purchasing power parity in Eastern European countries: quantile unit root tests. Empir Econ 52, 463–483 (2017). https://doi.org/10.1007/s00181-016-1099-z

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  • DOI: https://doi.org/10.1007/s00181-016-1099-z

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