ARE THE MEDITERRANEAN COUNTRIES WITH TOURISM PRICE INDICES IN THE PURCHASING POWER PARITY ZONE?
Jani Bekő - University of Maribor, Faculty of Economics and Business, Razlagova 14, 2000 Maribor, Slovenia
Darja Boršič - University of Maribor, Faculty of Economics and Business, Razlagova 14, 2000 Maribor, Slovenia
DOI: https://doi.org/10.31410/tmt.2020.107
5th International Thematic Monograph - Modern Management Tools and Economy of Tourism Sector in Present Era, Belgrade, 2020, Published by: Association of Economists and Managers of the Balkans in cooperation with the Faculty of Tourism and Hospitality, Ohrid, North Macedonia; ISSN 2683-5673, ISBN 978-86-80194-42-4; Editors: Vuk Bevanda, associate professor, Faculty of Social Sciences, Belgrade, Serbia; Snežana Štetić, full time professor, The College of Tourism, Belgrade, Serbia, Printed by: SKRIPTA International, Belgrade
Abstract: This chapter provides a detailed analysis of the validity of PPP for a cluster of 15 Mediterranean countries. The research has four original contributions. First, it uses two price indicators: a consumer price index for all items and a consumer price index for hotels and restaurants including catering and accommodation services. Second, it tests the exchange rate theory regarding two numeraire currencies. Third, due to the cyclicality of the tourism sector the study examines the significance of PPP by considering the impact of the Great Recession. Fourth, in order to test the mean reversion hypothesis, it uses a comprehensive set of panel unit root tests. The authors provide ample estimates in favour of PPP proposition. The evidence of mean reversion of real exchange rates is stronger (1) with price indices for hotels and restaurants, (2) in cases when the calculations are performed for EUR rates, and (3) for the post-Great Recession period.
Keywords: Price competitiveness, Tourism sector, Panel unit root tests, Consumer price indices for
hotels and restaurants.
REFERENCES
Arize, A. C., Malindretos, J., & Ghosh, D. (2015). Purchasing power parity-symmetry and proportionality:
evidence from 116 countries. International Review of Economics and Finance, 37(May),
69-85. https://doi.org/10.1016/j.iref.2014.11.014
Bahmani-Oskooee, M., Chang, T., & Liu, W. C. (2014). Revisiting purchasing power parity in 34
OECD countries: sequential panel selection method. Applied Economics Letters, 21(18), 1283-
1287. https://doi.org/10.1080/13504851.2014.923553
Bahmani-Oskooee, M., & Hegerty, S. W. (2010). Bounds testing cointegration methods and PPP:
evidence from 123 countries. Applied Economics Letters, 17(14), 1335-1340. https://doi.
org/10.1080/13504850902967456
Bahmani-Oskooee, M, & Kandil, M. (2007). Real and nominal effective exchange rates in MENA countries:
1970-2004. Applied Economics, 39(19), 2489-2501. https://doi.org/10.1080/00036840600690306
Bekő, J., & Boršič, D. (2018). Testing the purchasing power parity hypothesis: case of ASEAN economies.
Naše Gospodarstvo/Our Economy, 64(4), 74-85. https://doi.org/10.2478/ngoe-2018-0024
Bekő, J., Kavkler, A., & Boršič, D. (2012). PPP and nonlinearity of real exchange rates: new evidence
from transition economies. Applied Economics Letters, 19(18), 1851-1855. https://doi.org/10.1080
/13504851.2012.667544
Bergin, P. R., & Glick, R. (2007). Tradability, productivity, and international economic integration.
Journal of International Economics, 73(1), 128-151. https://doi.org/10.1016/j.jinteco.2007.01.002
Berka, M., & Devereux, M. B. (2013). Trends in European real exchange rates. Economic Policy, 28(74),
193-242. https://doi.org/10.1111/1468-0327.12006
Bénassy-Quéré, A., & Coulibaly, D. (2014). The impact of market regulations on intra-European real
exchange rates. Review of World Economics, 150(3), 529-556. https://doi.org/10.1007/s10290-014-
0185-6
Boršič, D., Baharumshah, A. Z., & Bekő, J. (2012). Are we getting closer to purchasing power parity in
Central and Eastern European economies? Applied Economics Letters, 19(1), 87-91. https://doi.or
g/10.1080/13504851.2011.568383
Boršič, D., & Bekő, J. (2018) Purchasing power parity in ASEAN+3: an application of panel unit
root tests. Croatian Review of Economic, Business and Social Statistics, 4(1), 42-52. https://doi.
org/10.2478/crebss-2018-0004
Breitung, J. (2000). The local power of some unit root tests for panel data. In B. Baltagi (Ed.), Advances
in Econometrics, Vol. 15: Nonstationary Panels, Panel Cointegration, and Dynamic Panels (pp.
161-178), Amsterdam: JAI Press. https://doi.org/10.1016/S0731-9053(00)15006-6
Camarero, M., Cuestas, J. C., & Ordóñez, J. (2006). Purchasing power parity versus the EU in
the Mediterranean countries. Applied Financial Economics, 16(1-2), 157-167. https://doi.
org/10.1080/09603100500390620
Choi, I. (2001). Unit root tests for panel data. Journal for International Money and Finance, 20(2), 249-
272. https://doi.org/10.1016/S0261-5606(00)00048-6
Christidou, M., & Panagiotidis, T. (2010). Purchasing power parity and the European single currency:
some new evidence. Economic Modelling, 27(5), 1116-1123. https://doi.org/10.1016/j.econmod.
2010.03.008
Eleftheriou, M., & Müller-Platenberg, N. A. (2018). The purchasing power parity fallacy: time to reconsider
the PPP hypothesis. Open Economies Review, 29(3), 481-515. https://doi.org/10.1007/s11079-
017-9473-9
Emirmahmutoglu, F., & Omay, T. (2014). Reexamining of PPP hypothesis: a nonlinear asymmetric heterogeneous
panel unit root test. Economic Modelling, 40(June), 184-190. https://doi.org/10.1016/j.
econmod.2014.03.028
Eurostat. (2020). Eurostat database. Available at: https://ec.europa.eu/eurostat/databrowser/view/PRC_
HICP_MMOR__custom_249560/default/table?lang=en [28 September 2020].
Froot, K. A., Kim, M, & Rogoff, K. (2019). The law of one price over 700 years. Annals of Economics
and Finance, 20(1), 1-35.
Froot, K. A., & Rogoff, K. (1995). Perspectives on PPP and long-run real exchange rates. In G. Grossman
& K. Rogoff (Ed.), Handbook of International Economics Vol. III, (pp. 1647-1688). Elsevier
Science. https://doi.org/10.1016/S1573-4404(05)80012-7
Giannellis, N., & Papadopoulos, A. P. (2010). Nonlinear exchange rate adjustment in the enlarged Eurozone:
evidence and implications for candidate countries. Review of International Economics,
18(4), 741-757. https://doi.org/10.1111/j.1467-9396.2010.00895.x
Huang, C. H., & Yang, C. Y. (2015). European exchange rate regimes and purchasing power parity: an
empirical study on eleven Eurozone countries. International Review of Economics and Finance,
35(January), 100-109. https://doi.org/10.1016/j.iref.2014.09.008
Hurlin, C. (2010). What would Nelson and Plosser find had they used panel unit root tests? Applied
Economics, 42(12), 1515-1531. https://doi.org/10.1080/00036840701721539
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of
Econometrics, 115(1), 53-74. https://doi.org/10.1016/S0304-4076(03)00092-7
International Monetary Fund. (2020). International financial statistics. Available at: https://data.imf.
org/?sk=4c514d48-b6ba-49ed-8ab9-52b0c1a0179b&sId=1390030341854. [28 September 2020].
Knoema. (2020). Knoema database. Available at: https://knoema.com/atlas/topics/Tourism/Travel-
and-Tourism-Total-Contribution-to-GDP/Contribution-of-travel-and-tourism-to-GDP-percentof-
GDP. [20 November 2020].
Koedijk, K. G., Tims, B., & van Dijk, M. A. (2004). Purchasing power parity and the euro area. Journal
of International Money and Finance, 23(7-8), 1081-1107. https://doi.org/10.1016/j.jimonfin.
2004.08.005
Koukouritakis, M. (2009). Testing the purchasing power parity: evidence from the new EU countries.
Applied Economics Letters, 16(1), 39-44. https://doi.org/10.1080/13504850701735807
Kula, F., Aslan, A., & Feridun, M. (2011). Purchasing power parity in MENA revisited: empirical evidence
in the presence of endogenously determined break points. Economic Research-Ekonomska
istraživanja, 24(1), 1-12. https://doi.org/10.1080/1331677X.2011.11517441
Laureti, L. (2001). Purchasing power parity and integration – empirical evidence in the Mediterranean
countries. Journal of Policy Modelling, 23(7), 731-751. https://doi.org/10.1016/S0161-
8938(01)00074-6
Levin, A., Lin, C. F., & Chu, C. (2002). Unit root testing in panel data: asymptotic and finite-sample
properties. Journal of Econometrics, 108(1), 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7
Lopez, C., & Papell, D. H. (2007). Convergence to purchasing power parity at the commencement
of the euro. Review of International Economics, 15(1), 1-16. https://doi.org/10.1111/j.1467-
9396.2007.00631.x
Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests with panel and a new simple
test. Oxford Bulletin of Economics and Statistics, 61(0), 631-653. https://doi.org/10.1111/1468-
0084.0610s1631
NBER. (2012). US business cycle expansions and contractions. Available at: http://www.nber.org/cycles/
US_Business_Cycle_Expansions_and_Contractions_20120423.pdf. [05 March 2018].
OECD. (2020). Consumer price indices (CPIs) - complete database. Available at: https://stats.oecd.org/
Index.aspx?DataSetCode=PRICES_CPI. [28 September 2020].
Papell, D. H., & Prodan, R. (2020). Long-run purchasing power parity redux. Journal of International
Money and Finance, 109(December), 1-12. https://doi.org/10.1016/j.jimonfin.2020.102260
Parikh, A., & Wakerly, E. (2000). Real exchange rates and unit root tests. Weltwirtschaftliches Archiv,
136(3), 478-490. https://doi.org/10.1007/BF02707290
Rabe, C., & Waddle, A. (2020). The evolution of purchasing power parity. Journal of International
Money and Finance, 109(December), 1-21. https://doi.org/10.1016/j.jimonfin.2020.102237
Ramajo, J., & Ferré, M. (2010). Purchasing power parity revisited: evidence from old and new tests for
an organisation for economic co-operation and development panel. Applied Economics, 42(17),
2243-2260. https://doi.org/10.1080/00036840701765486
Su, J. J., Cheung, A., & Roca, E. (2014). Does purchasing power parity hold? New evidence from
wild-bootstrapped nonlinear unit root tests in the presence of heteroscedasticity. Economic Modelling,
36(January), 161-171. https://doi.org/10.1016/j.econmod.2013.09.029
Taylor, M. P. (2006). Real exchange rates and purchasing power parity: mean-reversion in economic
thought. Applied Financial Economics, 16(1-2), 1-17. https://doi.org/10.1080/09603100500390067
Taylor, A. M., & Taylor, M. P. (2004). The purchasing power parity debate. The Journal of Economic
Perspectives, 18(4), 135-158. https://doi.org/10.1257/0895330042632744
The World Bank. (2020). The World Bank database. Available at: https://data.worldbank.org/indicator/
NE.TRD.GNFS.ZS. [20 November 2020].
Tubadji, A., & Nijkamp, P. (2018). Revisiting the Balassa-Samuelson effect: international tourism and
cultural proximity. Tourism Economics, 24(8), 915-944. https://doi.org/10.1177/1354816618781468
U.S. Bureau of Labor Statistics. (2020). Consumer price index (CPI) databases. Available at: https://
www.bls.gov/cpi/data.htm. [29 October 2020].
Wu, Y., & Lin, E. S. (2011). Does purchasing power parity hold following the launch of the euro?
Evidence from the panel unit root test. Applied Economics Letters, 18(2) 167-172. https://doi.
org/10.1080/13504850903442970
Zhou, S., & Kutan, A. M. (2011). Is the evidence for PPP reliable? A sustainability examination of the
stationarity of real exchange rates. Journal of Banking & Finance, 35(9), 2479-2490. https://doi.
org/10.1016/j.jbankfin.2011.02.006
Keywords: Price competitiveness, Tourism sector, Panel unit root tests, Consumer price indices for
hotels and restaurants.
REFERENCES
Arize, A. C., Malindretos, J., & Ghosh, D. (2015). Purchasing power parity-symmetry and proportionality:
evidence from 116 countries. International Review of Economics and Finance, 37(May),
69-85. https://doi.org/10.1016/j.iref.2014.11.014
Bahmani-Oskooee, M., Chang, T., & Liu, W. C. (2014). Revisiting purchasing power parity in 34
OECD countries: sequential panel selection method. Applied Economics Letters, 21(18), 1283-
1287. https://doi.org/10.1080/13504851.2014.923553
Bahmani-Oskooee, M., & Hegerty, S. W. (2010). Bounds testing cointegration methods and PPP:
evidence from 123 countries. Applied Economics Letters, 17(14), 1335-1340. https://doi.
org/10.1080/13504850902967456
Bahmani-Oskooee, M, & Kandil, M. (2007). Real and nominal effective exchange rates in MENA countries:
1970-2004. Applied Economics, 39(19), 2489-2501. https://doi.org/10.1080/00036840600690306
Bekő, J., & Boršič, D. (2018). Testing the purchasing power parity hypothesis: case of ASEAN economies.
Naše Gospodarstvo/Our Economy, 64(4), 74-85. https://doi.org/10.2478/ngoe-2018-0024
Bekő, J., Kavkler, A., & Boršič, D. (2012). PPP and nonlinearity of real exchange rates: new evidence
from transition economies. Applied Economics Letters, 19(18), 1851-1855. https://doi.org/10.1080
/13504851.2012.667544
Bergin, P. R., & Glick, R. (2007). Tradability, productivity, and international economic integration.
Journal of International Economics, 73(1), 128-151. https://doi.org/10.1016/j.jinteco.2007.01.002
Berka, M., & Devereux, M. B. (2013). Trends in European real exchange rates. Economic Policy, 28(74),
193-242. https://doi.org/10.1111/1468-0327.12006
Bénassy-Quéré, A., & Coulibaly, D. (2014). The impact of market regulations on intra-European real
exchange rates. Review of World Economics, 150(3), 529-556. https://doi.org/10.1007/s10290-014-
0185-6
Boršič, D., Baharumshah, A. Z., & Bekő, J. (2012). Are we getting closer to purchasing power parity in
Central and Eastern European economies? Applied Economics Letters, 19(1), 87-91. https://doi.or
g/10.1080/13504851.2011.568383
Boršič, D., & Bekő, J. (2018) Purchasing power parity in ASEAN+3: an application of panel unit
root tests. Croatian Review of Economic, Business and Social Statistics, 4(1), 42-52. https://doi.
org/10.2478/crebss-2018-0004
Breitung, J. (2000). The local power of some unit root tests for panel data. In B. Baltagi (Ed.), Advances
in Econometrics, Vol. 15: Nonstationary Panels, Panel Cointegration, and Dynamic Panels (pp.
161-178), Amsterdam: JAI Press. https://doi.org/10.1016/S0731-9053(00)15006-6
Camarero, M., Cuestas, J. C., & Ordóñez, J. (2006). Purchasing power parity versus the EU in
the Mediterranean countries. Applied Financial Economics, 16(1-2), 157-167. https://doi.
org/10.1080/09603100500390620
Choi, I. (2001). Unit root tests for panel data. Journal for International Money and Finance, 20(2), 249-
272. https://doi.org/10.1016/S0261-5606(00)00048-6
Christidou, M., & Panagiotidis, T. (2010). Purchasing power parity and the European single currency:
some new evidence. Economic Modelling, 27(5), 1116-1123. https://doi.org/10.1016/j.econmod.
2010.03.008
Eleftheriou, M., & Müller-Platenberg, N. A. (2018). The purchasing power parity fallacy: time to reconsider
the PPP hypothesis. Open Economies Review, 29(3), 481-515. https://doi.org/10.1007/s11079-
017-9473-9
Emirmahmutoglu, F., & Omay, T. (2014). Reexamining of PPP hypothesis: a nonlinear asymmetric heterogeneous
panel unit root test. Economic Modelling, 40(June), 184-190. https://doi.org/10.1016/j.
econmod.2014.03.028
Eurostat. (2020). Eurostat database. Available at: https://ec.europa.eu/eurostat/databrowser/view/PRC_
HICP_MMOR__custom_249560/default/table?lang=en [28 September 2020].
Froot, K. A., Kim, M, & Rogoff, K. (2019). The law of one price over 700 years. Annals of Economics
and Finance, 20(1), 1-35.
Froot, K. A., & Rogoff, K. (1995). Perspectives on PPP and long-run real exchange rates. In G. Grossman
& K. Rogoff (Ed.), Handbook of International Economics Vol. III, (pp. 1647-1688). Elsevier
Science. https://doi.org/10.1016/S1573-4404(05)80012-7
Giannellis, N., & Papadopoulos, A. P. (2010). Nonlinear exchange rate adjustment in the enlarged Eurozone:
evidence and implications for candidate countries. Review of International Economics,
18(4), 741-757. https://doi.org/10.1111/j.1467-9396.2010.00895.x
Huang, C. H., & Yang, C. Y. (2015). European exchange rate regimes and purchasing power parity: an
empirical study on eleven Eurozone countries. International Review of Economics and Finance,
35(January), 100-109. https://doi.org/10.1016/j.iref.2014.09.008
Hurlin, C. (2010). What would Nelson and Plosser find had they used panel unit root tests? Applied
Economics, 42(12), 1515-1531. https://doi.org/10.1080/00036840701721539
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of
Econometrics, 115(1), 53-74. https://doi.org/10.1016/S0304-4076(03)00092-7
International Monetary Fund. (2020). International financial statistics. Available at: https://data.imf.
org/?sk=4c514d48-b6ba-49ed-8ab9-52b0c1a0179b&sId=1390030341854. [28 September 2020].
Knoema. (2020). Knoema database. Available at: https://knoema.com/atlas/topics/Tourism/Travel-
and-Tourism-Total-Contribution-to-GDP/Contribution-of-travel-and-tourism-to-GDP-percentof-
GDP. [20 November 2020].
Koedijk, K. G., Tims, B., & van Dijk, M. A. (2004). Purchasing power parity and the euro area. Journal
of International Money and Finance, 23(7-8), 1081-1107. https://doi.org/10.1016/j.jimonfin.
2004.08.005
Koukouritakis, M. (2009). Testing the purchasing power parity: evidence from the new EU countries.
Applied Economics Letters, 16(1), 39-44. https://doi.org/10.1080/13504850701735807
Kula, F., Aslan, A., & Feridun, M. (2011). Purchasing power parity in MENA revisited: empirical evidence
in the presence of endogenously determined break points. Economic Research-Ekonomska
istraživanja, 24(1), 1-12. https://doi.org/10.1080/1331677X.2011.11517441
Laureti, L. (2001). Purchasing power parity and integration – empirical evidence in the Mediterranean
countries. Journal of Policy Modelling, 23(7), 731-751. https://doi.org/10.1016/S0161-
8938(01)00074-6
Levin, A., Lin, C. F., & Chu, C. (2002). Unit root testing in panel data: asymptotic and finite-sample
properties. Journal of Econometrics, 108(1), 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7
Lopez, C., & Papell, D. H. (2007). Convergence to purchasing power parity at the commencement
of the euro. Review of International Economics, 15(1), 1-16. https://doi.org/10.1111/j.1467-
9396.2007.00631.x
Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests with panel and a new simple
test. Oxford Bulletin of Economics and Statistics, 61(0), 631-653. https://doi.org/10.1111/1468-
0084.0610s1631
NBER. (2012). US business cycle expansions and contractions. Available at: http://www.nber.org/cycles/
US_Business_Cycle_Expansions_and_Contractions_20120423.pdf. [05 March 2018].
OECD. (2020). Consumer price indices (CPIs) - complete database. Available at: https://stats.oecd.org/
Index.aspx?DataSetCode=PRICES_CPI. [28 September 2020].
Papell, D. H., & Prodan, R. (2020). Long-run purchasing power parity redux. Journal of International
Money and Finance, 109(December), 1-12. https://doi.org/10.1016/j.jimonfin.2020.102260
Parikh, A., & Wakerly, E. (2000). Real exchange rates and unit root tests. Weltwirtschaftliches Archiv,
136(3), 478-490. https://doi.org/10.1007/BF02707290
Rabe, C., & Waddle, A. (2020). The evolution of purchasing power parity. Journal of International
Money and Finance, 109(December), 1-21. https://doi.org/10.1016/j.jimonfin.2020.102237
Ramajo, J., & Ferré, M. (2010). Purchasing power parity revisited: evidence from old and new tests for
an organisation for economic co-operation and development panel. Applied Economics, 42(17),
2243-2260. https://doi.org/10.1080/00036840701765486
Su, J. J., Cheung, A., & Roca, E. (2014). Does purchasing power parity hold? New evidence from
wild-bootstrapped nonlinear unit root tests in the presence of heteroscedasticity. Economic Modelling,
36(January), 161-171. https://doi.org/10.1016/j.econmod.2013.09.029
Taylor, M. P. (2006). Real exchange rates and purchasing power parity: mean-reversion in economic
thought. Applied Financial Economics, 16(1-2), 1-17. https://doi.org/10.1080/09603100500390067
Taylor, A. M., & Taylor, M. P. (2004). The purchasing power parity debate. The Journal of Economic
Perspectives, 18(4), 135-158. https://doi.org/10.1257/0895330042632744
The World Bank. (2020). The World Bank database. Available at: https://data.worldbank.org/indicator/
NE.TRD.GNFS.ZS. [20 November 2020].
Tubadji, A., & Nijkamp, P. (2018). Revisiting the Balassa-Samuelson effect: international tourism and
cultural proximity. Tourism Economics, 24(8), 915-944. https://doi.org/10.1177/1354816618781468
U.S. Bureau of Labor Statistics. (2020). Consumer price index (CPI) databases. Available at: https://
www.bls.gov/cpi/data.htm. [29 October 2020].
Wu, Y., & Lin, E. S. (2011). Does purchasing power parity hold following the launch of the euro?
Evidence from the panel unit root test. Applied Economics Letters, 18(2) 167-172. https://doi.
org/10.1080/13504850903442970
Zhou, S., & Kutan, A. M. (2011). Is the evidence for PPP reliable? A sustainability examination of the
stationarity of real exchange rates. Journal of Banking & Finance, 35(9), 2479-2490. https://doi.
org/10.1016/j.jbankfin.2011.02.006
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