TESTING PURCHASING POWER PARITY IN THE EUROZONE: A UNIT ROOT ANALYSIS
Journal Title: MSA-Management Sciences Journal (MSA-MSJ) - Year 2023, Vol 2, Issue 2
Abstract
The Purchasing Power Parity (PPP) hypothesis is a central and important equilibrium condition in international finance and macroeconomics, proposing that nominal exchange rates and prices have a proportional relationship and will converge to a constant level over the long run. The Eurozone's creation and establishment have provided an ideal framework to test PPP due to the equivalent set of monetary and economic characteristics required to adopt the Euro. This paper examines the empirical validity of PPP within the initial Eurozone countries using unit root testing methodologies. The research problem presented in this paper lies in the low power nature of unit root testing methodologies that lead to the rejection of PPP. The importance of this paper is determining the validity of the hypothesis of PPP, which is significant in understanding the differences in price levels, purchasing power of different currencies between different countries, and the relative stability of exchange rates through a long-run equilibrium relationship between exchange rates and prices.
Authors and Affiliations
Zyad Hebisha
Keywords
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