Purchasing Power Parity in Eastern European Countries: Further Evidence from Black Market Exchange Rates

Abstract

The purchasing power parity (PPP) has been amongst the most tested theories in the international finance literature. The empirical findings from the extant literature for the PPP hypothesis are mixed. This article applies univariate and panel Lagrange Multiplier (LM) unit root tests with one and two structural breaks to real exchange rates for six Eastern European countries. Both univariate and panel LM tests with structural breaks strongly suggest that PPP is valid hypothesis for Bulgaria, Czech Republic, Hungary, Poland, Romania and Russia.PPP, Black Market Exchange Rates, Eastern European countries