VALIDITY OF THE PURCHASING POWER PARITY IN THE SELECTED EUROPEAN UNION'S COUNTRIES: STATIONARITY AND COINTEGRATION APPROACH

This paper deals with the analysis of the purchasing power parity (PPP) in the selected European Union's countries (Czech Republic, Hungary, Latvia, Poland, Romania and Slovakia) during the period January 1999 - November 2008 (119 observations) using the euro as a base currency. In the first step we examine the stationarity of the individual real exchange rates using the ADF (Augmented Dickey - Fuller) and PP (Phillips - Perron) unit root tests. All the real exchange rates were identified as to be non-stationary, so the PPP can not hold. Further analysis was done using the Engle-Granger cointegration approach and Johansen cointegration approach. Both approaches provide support for the validity of the PPP only for Hungary - the values of estimated parameters, however, are not consistent with the PPP theory. Finally we present the Larson et al. panel cointegration technique which enables to overcome the problems with the low power of the unit root and cointegration tests in case of short sample sizes. The absence of cointegration in majority of analysed countries makes it impossible to apply this modem technique.