Proceedings of the 22nd International Academic Conference, Lisbon

TESTING FOR PURCHASING POWER PARITY FOR SELECTED CIS COUNTRIES USING THE SIEVE BOOTSTRAP

MEHMET FATIH TRAŞ, ESRA BALLI, ÇILER SIGEZE

Abstract:

Purchasing power parity (PPP) is widely discussed theory to explain the determination of exchange rates. PPP implies a long-run relationship between the nominal exchange rate and the relative price levels. PPP holds in the long run once the real exchange rate is a stationary process. This study examines the validity of PPP for Commonwealth of Independent States (CIS) namely Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Russia and Ukraine for the period 1995M1-2015M11. In this study we perform stationary test on three bases. In the first place, we initiate conventional unit root tests such as ADF and KPSS. Secondly, we utilize unit root tests allowing for structural break. Last but not least, we use a sieve bootstrap unit root test to avoid possible discrepancies between the actual and nominal rejection probabilities in hypothesis testing of unit root. In conclusion unit root test results performed show that there is a large disagreement on the validity of PPP in CIS countries. Given the span and characteristics of the period which involves a significant break such as 1998 Russian economic crisis, we conclude that PPP holds for Armenia, Belarus, Kazakhstan and Kyrgyzstan, while it does not hold for Azerbaijan, Russia and Ukraine.

Keywords: Purchasing Power Parity; Real Exchange Rate; Transition Economies

DOI: 10.20472/IAC.2016.022.058

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