Is Purchasing Power Parity Hypothesis Reasonable from the View of Trade Blocks and Currency Zones?
Yutaka Kurihara European Research Studies Journal, 2009, vol. XII, issue 3, pages 3-14 Abstract: Since the 1980s, many regional agreements have appeared to facilitate trade and spur economic growth. This paper examines whether or not the purchasing power parity (PPP) hypothesis for regional agreements has been satisfied. This study employs a nonlinear unit root test for real exchange rates (RERs). Overall, the test results provide stronger support for PPP than any earlier studies of bilateral PPP for trade/currency integrated countries. When the data for the postintegration period are included, the evidence for PPP becomes more significant. Regional agreements have promoted the PPP hypothesis. KPSS tests provide more evidence for PPP than the ADF and PP tests for the RERs of European Union (EU) countries against the currency of Germany and the euro but not for the RERs against the US dollar. These results show that convergence toward PPP between the EU countries tends to be nonlinear b
