Purchasing Power Parity in Transition Economies: Does It Hold in the Czech Republic, Hungary and Slovenia?

Abstract

This article assesses the theory of purchasing power parity for the Czech Republic, Hungary and Slovenia in comparison with Austria, Germany, France and Italy, employing data from January 1992 to December 2006. The unit root tests applied fail to prove stationarity of the real exchange rate series. Although cointegration was found among nominal exchange rates and selected consumer price indices, the theory of purchasing power parity could not be confirmed for any of the three advanced transition countries. Following the literature on price movements and macroeconomic policies in transition economies, we list some arguments that substantiate our findings.