Abstract
The sustainability of purchasing power parity (PPP) theory is examined within the quantile autoregression model for the monthly data of the euro and the US dollar-based real exchange rate (RER) in selected European economies (the Czech Republic, Hungary, Poland, Romania, Serbia and Turkey). Period from January 2000 to December 2014 is covered. The application of quantile autoregression model is motivated by the necessity of identifying asymmetric behavior of the RER due to the shocks of different size and sign. The empirical results support to some extent the PPP theory for the euro- and US dollar-based RER in Romania, Serbia, and Turkey. The euro-based RER in Hungary and Poland is also identified to confirm the PPP theory. The dynamics of the RER in the Czech Republic cannot be associated with the PPP validity. The persistence of the euro-based RER is estimated to be more prominent after the depreciation shocks of smaller size.
Highlights
We analyzed the sustainability of purchasing power parity (PPP) theory in the following emerging European countries: the Czech Republic, Poland, Hungary, Romania, Serbia and Turkey, during the period of January 2000 to December 2014
The time series of the real exchange rate (RER) is formed using the logarithm of monthly data for: nominal exchange rate (e ) and the consumer price index (CPI) within individual countries (p∗), the Eurozone or the US market (p ): rer = e − p∗ + p
At the same time, testing the sustainability of the PPP theory for both the euro- and the US dollar-based real exchange rate is relevant given the international importance of the two leading currencies, as well as their dominance in the world trade
Summary
The results of the research in the article of Konstantin Kuck, Robert Maderitsch, and Karsten Schweikert (2015) indicate that for most exchange rates, the US dollar depreciation refers to the negative dependence on past returns, whereas a positive dependence on past returns occurred after the appreciation. This tendency is explained by the presence of various factors on the international market, such as incomplete information about the currency movements, central bank interventions, currency carry trade, capital flows, activities of market participants vulnerable to the risk. This section shortly summarizes theoretical results on baseline QAR model and quantile unit root tests as defined in Koenker and Xiao (2004, 2006)
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