Re-examining long-run purchasing power parity for Central and Eastern European countries: nonlinear panel unit root tests

Abstract

This study applies nonlinear panel unit root test to assess the nonstationary properties of the real exchange rate for seven Central and Eastern European countries (CEEC). We find that nonlinear panel unit root test has higher power than linear method suggested by Breuer et al. (2001) if the true data-generating process of exchange rate is in fact a stationary nonlinear process. We re-examine the validity of Purchasing Power Parity (PPP) from the panel nonlinear point of view and provide robust evidence that clearly indicates that PPP holds true for five countries, namely, Bulgaria, Hungary, Poland, Romania and Russia. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a nonlinear way.