Purchasing Power Parity Hypothesis: Mixed Evidence from Eastern Europe Emerging Markets

Abstract

This paper investigates whether the purchasing power parity (PPP) hypothesis holds in the Czech Republic, Hungary, and Poland by considering currencies of their five largest trading partners. We employ eight panel unit root tests that can be arranged in groups by cross-section independence or dependence. Empirical findings show that the stochastic behavior of real exchange rates in the Czech Republic and Poland is not a mean reversion, and the PPP condition does not hold for them. However, we obtain mixed empirical evidence in Hungary. Limited evidence is found for validity of the PPP hypothesis among currencies of Hungary's largest trading partners.