Purchasing Power Parity in B5 Countries: How Important Are Tourism Prices?
Jani Bekő - University of Maribor, Faculty of Economics and Business, Slovenia
Darja Boršič - University of Maribor, Faculty of Economics and Business, Slovenia
DOI: https://doi.org/10.31410/tmt.2023-2024.61
Jani Bekő - University of Maribor, Faculty of Economics and Business, Slovenia
Darja Boršič - University of Maribor, Faculty of Economics and Business, Slovenia
DOI: https://doi.org/10.31410/tmt.2023-2024.61
8th International Thematic Monograph - Modern Management Tools and Economy of Tourism Sector in Present Era, Belgrade, 2023/2024, 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 978-86-80194-81-3 ; 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 examines the PPP hypothesis in five Balkan countries (B5). The current analysis incorporates four important novelties. First, from a methodological standpoint, the PPP is scrutinized by a range of first-generation and second-generation panel unit root tests. Additionally, three panel cointegration tests are performed: the Pedroni residual cointegration test, the Kao residual cointegration test and the Johansen Fisher cointegration test. Second, the study utilizes two price indicators: the consumer price index for hotels and restaurants and the general consumer price index. Third, the PPP proposition for the Balkan economies is inspected using a new, updated data set covering the period from January 2006 to December 2023. Fourth, two numeraire currencies, the euro and the USD, are operated to assess the validity of exchange rate parity conditions. The econometric results provide resolute support for the PPP concept in the group of B5 countries.
Keywords: Panel unit root tests; Panel cointegration tests; Tourism sector; Consumer price indices for hotels and restaurants
REFERENCES
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Baharumshah, A. Z., Soon, S. V., Fountas, S., & Mohamad Shariff, N. S. (2016). Persistence of real exchange rates in the Central and Eastern European Countries. Journal of Business Economics and Management, 17(3), 381-396. https://doi.org/10.3846/16111699.2015.1101396
Bahmani-Oskooee, M., Chang, T., Chen, T. H., & Tzeng, H. W. (2017). Revisiting purchasing power parity in Eastern European countries: quantile unit root tests. Empirical Economics, 52(2), 463-483. https://doi.org/10.1007/s00181-016-1099-z
Bai, J., & Ng, S. (2002). Determining the number of factors in approximate factor models. Econometrica, 70(1), 191-221. https://doi.org/10.1111/1468-0262.00273
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Banerjee, A., & Wagner, M. (2009). Panel Methods to Test for Unit Roots and Cointegration. Palgrave Handbook of Econometrics, 632-726. https://doi.org/10.1057/9780230244405_13
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., & Boršič, D. (2023). Testing the purchasing power parity hypothesis with tourism price indices for OECD countries. In: Bevanda, V., & Štetić, S. (eds.). Modern management tools and economy of tourism sector in present era: 7th international thematic monograph. Belgrade: Association of Economists and Managers of the Balkans, Ohrid: Faculty of Tourism and Hospitality, 21-49. https://doi.org/10.31410/tmt.2022-2023.21
Bekő, J., & Kavkler, A. (2019). Do real exchange rates in small Central and Eastern European economies obey purchasing power parity? International Journal of Sustainable Economy, 11(2), 121-140. https://doi.org/10.1504/IJSE.2019.10020034
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
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Carvalho, M., & Júlio, P. (2012). Digging out the PPP hypothesis: an integrated empirical coverage. Empirical Economics, 42(3), 713-744. https://doi.org/10.1007/s00181-010-0441-0
Chang, H. L., Liu, D. C., & Su, C. W. (2012). Purchasing power parity with flexible Fourier stationary test for Central and Eastern European countries. Applied Economics, 44(32), 4249- 4256. http://doi.org/10.1080/00036846.2011.587791
Chang, T., & Tzeng, H. W. (2011). Long-run purchasing power parity with asymmetric adjustment: further evidence from nine transition countries. Economic Modelling, 28(3), 1383- 1391. https://doi.org/10.1016/j.econmod.2011.02.012
Chang, T., & Tzeng, H. W. (2013). Purchasing power parity in nine transition countries: panel SURKSS test. International Journal of Finance & Economics, 18(1), 74-81. https://doi. org/10.1002/ijfe.457
Cheung, Y. W., Chinn, M., & Fujii, E. (2001). Market structure and the persistence of sectoral real exchange rates. International Journal of Finance and Economics, 6(2), 95-114. https:// doi.org/10.1002/ijfe.151
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
Christev, A., & Noorbakhsh, A. (2000). Long-run purchasing power parity, prices and exchange rates in transition: the case of six Central and East European countries. Global Finance Journal, 11(1-2), 87-108. https://doi.org/10.1016/S1044-0283(00)00016-8
Coleman, S., & Cuestas, J. C. (2023). On the evolution of competitiveness in Central and Eastern Europe: Is it broken? International Journal of Finance & Economics. https://doi. org/10.1002/ijfe.2810
Drissi, R., & Boukhatem, J. (2020). A nonlinear adjustment in real exchange rates under transaction costs hypothesis in developed and emerging countries. Quantitative Finance and Economics, 4(2), 220-235. https://doi.org/10.3934/QFE.2020010
Engle, R. F., & Granger, C. W. J. (1987). Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55(2), 251. https://doi.org/10.2307/1913236
Eurostat. (2024). Eurostat database. Retrieved January 10, 2024, from https://ec.europa.eu/ eurostat/databrowser/view/tec00114/default/table?lang=en
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Fisher, R. A. (1932). Statistical methods for research workers, 4th edition. Edinburgh: Oliver&Boyd.
Froot, K. A., & Rogoff, K. (1995). Perspectives on PPP and long-run real exchange rates. In: Grossman, G., & Rogoff, K. (eds.). Handbook of international economics Vol. III, Elsevier Science, 1647-1688. https://doi.org/10.1016/S1573-4404(05)80012-7
Groneck, M., & Kaufmann, C. (2017). Determinants of relative sectoral prices: the role of demographic change. Oxford Bulletin of Economics and Statistics, 79(3), 319-347. https://doi. org/10.1111/obes.12149
He, H., & Chang, T. (2013). Purchasing power parity in transition countries: sequential panel selection method. Economic Modelling, 35(September), 604-609. https://doi/org/10.1016/j. econmod.2013.08.021
He, H., Ranjbar, O., & Chang, T. (2013). Purchasing power parity in transition countries: old wine with new bottle. Japan and the World Economy, 28(December), 24-32. https://doi. org/10.1016/j.japwor.2013.06.002
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. (2024). International financial statistics. Retrieved January 23, 2024, from https://data.imf.org/?sk=4c514d48-b6ba-49ed-8ab9-52b0c1a0179b&sId=1390030341854
Jiang, C., Jian, N., Liu, T. Y., & Su, C. W. (2016). Purchasing power parity and real exchange rate in Central Eastern European countries. International Review of Economics and Finance, 44(July), 349-358. https://doi.org/10.1016/j.iref.2016.02.006
Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551-1580. https://doi. org/10.2307/2938278
Kao, C. D. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1), 1-44. https://doi/org/10.1016/S0304-4076(98)00023-2
Kasman, S., Kasman, A., & Ayhan, D. (2010). Testing purchasing power parity hypothesis for the new member and candidate countries of the European Union: evidence from Lagrange multiplier unit root tests with structural breaks. Emerging Markets Finance & Trade, 46(2), 53-65. https://doi.org/0.2753/REE1540-496X460204
Kavkler, A., Boršič, D., & Bekő, J. (2012). PPP in Central and Eastern European economies: further evidence from panel unit root tests. Applied Economics Letters, 19(16), 1543- 1548. https://doi.org/10.1080/13504851.2011.637891
Koukouritakis, M. (2009). Testing the purchasing power parity: evidence from new EU countries. Applied Economics Letters, 16(1), 39-44. https://doi.org/10.1080/13504850701735807
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
Liu, S., Zhang, D., & Chang, T. (2012). Purchasing power parity – nonlinear threshold unit root test for transition countries. Applied Economics Letters, 19(18), 1781-1785. https:// doi.org/10.1080/13504851.2012.654905
Liu, Y. S., Su, C. W., & Zhu, M. N. (2011). Purchasing power parity with threshold effects for Central and Eastern European countries. Applied Economics Letters, 18(18), 1801-1806. https://doi.org/10.1080/13504851.2011.564121
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Keywords: Panel unit root tests; Panel cointegration tests; Tourism sector; Consumer price indices for hotels and restaurants
REFERENCES
Acaravci, A., & Ozturk, I. (2010). Testing purchasing power parity in transition countries: evidence from structural breaks. Amfiteatru Economic, 12(27), 190-198.
Ahn, S. C., & Horenstein, A. R. (2013). Eigenvalue ratio test for the number of factors. Econometrica, 81(3), 1203-1227. https://doi.org/10.3982/ECTA8968
Baharumshah, A. Z., Soon, S. V., Fountas, S., & Mohamad Shariff, N. S. (2016). Persistence of real exchange rates in the Central and Eastern European Countries. Journal of Business Economics and Management, 17(3), 381-396. https://doi.org/10.3846/16111699.2015.1101396
Bahmani-Oskooee, M., Chang, T., Chen, T. H., & Tzeng, H. W. (2017). Revisiting purchasing power parity in Eastern European countries: quantile unit root tests. Empirical Economics, 52(2), 463-483. https://doi.org/10.1007/s00181-016-1099-z
Bai, J., & Ng, S. (2002). Determining the number of factors in approximate factor models. Econometrica, 70(1), 191-221. https://doi.org/10.1111/1468-0262.00273
Bai, J., & Ng, S. (2004). A PANIC attack on unit roots and cointegration. Econometrica, 72(4), 1127-1177. https://doi.org/10.1111/j.1468-0262.2004.00528.x
Banerjee, A., & Wagner, M. (2009). Panel Methods to Test for Unit Roots and Cointegration. Palgrave Handbook of Econometrics, 632-726. https://doi.org/10.1057/9780230244405_13
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., & Boršič, D. (2023). Testing the purchasing power parity hypothesis with tourism price indices for OECD countries. In: Bevanda, V., & Štetić, S. (eds.). Modern management tools and economy of tourism sector in present era: 7th international thematic monograph. Belgrade: Association of Economists and Managers of the Balkans, Ohrid: Faculty of Tourism and Hospitality, 21-49. https://doi.org/10.31410/tmt.2022-2023.21
Bekő, J., & Kavkler, A. (2019). Do real exchange rates in small Central and Eastern European economies obey purchasing power parity? International Journal of Sustainable Economy, 11(2), 121-140. https://doi.org/10.1504/IJSE.2019.10020034
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
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(1-3), 87-91. http://doi.org/10.1080/13504851.2011.568383
Bošnjak, M., Bilas, V., & Novak, I. (2020). Re-examining purchasing power parity in Croatia: quantile autoregression approach. Ekonomski pregled, 71(3), 203-214. https://doi. org/10.32910/ep.71.3.1
Breitung, J. (2000). The local power of some unit root tests for panel data. In: Baltagi, B. (ed.). Advances in econometrics, Vol. 15: Nonstationary panels, panel cointegration, and dynamic panels, Amsterdam: JAI Press, 161-178. https://doi.org/10.1016/S0731-9053(00)15006-6
Carvalho, M., & Júlio, P. (2012). Digging out the PPP hypothesis: an integrated empirical coverage. Empirical Economics, 42(3), 713-744. https://doi.org/10.1007/s00181-010-0441-0
Chang, H. L., Liu, D. C., & Su, C. W. (2012). Purchasing power parity with flexible Fourier stationary test for Central and Eastern European countries. Applied Economics, 44(32), 4249- 4256. http://doi.org/10.1080/00036846.2011.587791
Chang, T., & Tzeng, H. W. (2011). Long-run purchasing power parity with asymmetric adjustment: further evidence from nine transition countries. Economic Modelling, 28(3), 1383- 1391. https://doi.org/10.1016/j.econmod.2011.02.012
Chang, T., & Tzeng, H. W. (2013). Purchasing power parity in nine transition countries: panel SURKSS test. International Journal of Finance & Economics, 18(1), 74-81. https://doi. org/10.1002/ijfe.457
Cheung, Y. W., Chinn, M., & Fujii, E. (2001). Market structure and the persistence of sectoral real exchange rates. International Journal of Finance and Economics, 6(2), 95-114. https:// doi.org/10.1002/ijfe.151
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
Christev, A., & Noorbakhsh, A. (2000). Long-run purchasing power parity, prices and exchange rates in transition: the case of six Central and East European countries. Global Finance Journal, 11(1-2), 87-108. https://doi.org/10.1016/S1044-0283(00)00016-8
Coleman, S., & Cuestas, J. C. (2023). On the evolution of competitiveness in Central and Eastern Europe: Is it broken? International Journal of Finance & Economics. https://doi. org/10.1002/ijfe.2810
Drissi, R., & Boukhatem, J. (2020). A nonlinear adjustment in real exchange rates under transaction costs hypothesis in developed and emerging countries. Quantitative Finance and Economics, 4(2), 220-235. https://doi.org/10.3934/QFE.2020010
Engle, R. F., & Granger, C. W. J. (1987). Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55(2), 251. https://doi.org/10.2307/1913236
Eurostat. (2024). Eurostat database. Retrieved January 10, 2024, from https://ec.europa.eu/ eurostat/databrowser/view/tec00114/default/table?lang=en
Findreng, J. H. (2014). Relative purchasing power parity and the European monetary union: evidence from Eastern Europe. Economics & Sociology, 7(1), 22-38. https://doi. org/10.14254/2071-789X.2014/7-1/3
Fisher, R. A. (1932). Statistical methods for research workers, 4th edition. Edinburgh: Oliver&Boyd.
Froot, K. A., & Rogoff, K. (1995). Perspectives on PPP and long-run real exchange rates. In: Grossman, G., & Rogoff, K. (eds.). Handbook of international economics Vol. III, Elsevier Science, 1647-1688. https://doi.org/10.1016/S1573-4404(05)80012-7
Groneck, M., & Kaufmann, C. (2017). Determinants of relative sectoral prices: the role of demographic change. Oxford Bulletin of Economics and Statistics, 79(3), 319-347. https://doi. org/10.1111/obes.12149
He, H., & Chang, T. (2013). Purchasing power parity in transition countries: sequential panel selection method. Economic Modelling, 35(September), 604-609. https://doi/org/10.1016/j. econmod.2013.08.021
He, H., Ranjbar, O., & Chang, T. (2013). Purchasing power parity in transition countries: old wine with new bottle. Japan and the World Economy, 28(December), 24-32. https://doi. org/10.1016/j.japwor.2013.06.002
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. (2024). International financial statistics. Retrieved January 23, 2024, from https://data.imf.org/?sk=4c514d48-b6ba-49ed-8ab9-52b0c1a0179b&sId=1390030341854
Jiang, C., Jian, N., Liu, T. Y., & Su, C. W. (2016). Purchasing power parity and real exchange rate in Central Eastern European countries. International Review of Economics and Finance, 44(July), 349-358. https://doi.org/10.1016/j.iref.2016.02.006
Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551-1580. https://doi. org/10.2307/2938278
Kao, C. D. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1), 1-44. https://doi/org/10.1016/S0304-4076(98)00023-2
Kasman, S., Kasman, A., & Ayhan, D. (2010). Testing purchasing power parity hypothesis for the new member and candidate countries of the European Union: evidence from Lagrange multiplier unit root tests with structural breaks. Emerging Markets Finance & Trade, 46(2), 53-65. https://doi.org/0.2753/REE1540-496X460204
Kavkler, A., Boršič, D., & Bekő, J. (2012). PPP in Central and Eastern European economies: further evidence from panel unit root tests. Applied Economics Letters, 19(16), 1543- 1548. https://doi.org/10.1080/13504851.2011.637891
Koukouritakis, M. (2009). Testing the purchasing power parity: evidence from new EU countries. Applied Economics Letters, 16(1), 39-44. https://doi.org/10.1080/13504850701735807
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
Liu, S., Zhang, D., & Chang, T. (2012). Purchasing power parity – nonlinear threshold unit root test for transition countries. Applied Economics Letters, 19(18), 1781-1785. https:// doi.org/10.1080/13504851.2012.654905
Liu, Y. S., Su, C. W., & Zhu, M. N. (2011). Purchasing power parity with threshold effects for Central and Eastern European countries. Applied Economics Letters, 18(18), 1801-1806. https://doi.org/10.1080/13504851.2011.564121
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(1), 631-653. https://doi. org/10.1111/1468-0084.0610s1631
Maican, F. G., & Sweeney, R. J. (2013). Real exchange rate adjustment in European transition countries. Journal of Banking & Finance, 37(3), 907-926. https://doi.org/10.1016/j. jbankfin.2012.10.007
Mladenović, Z., & Bodor, S. (2020). Dynamics of the real exchange rate in European emerging economies: evidence from quantile regression. Panoeconomicus, 67(1), 27-50. https:// doi.org/10.2298/PAN170125024M
Nusair, S. A. (2013). Real exchange rate dynamics in transition economies: a nonlinear analysis. International Journal of Finance and Economics, 18(2), 188-204. https://doi. org/10.1162/10811820160080077
Parikh, A., & Wakerly, E. (2000). Real exchange rates and unit root tests. Weltwirtschaftliches Archiv, 136(3), 478-490. https://doi.org/10.1007/BF02707290
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61(1), 653-670. https://doi. org/10.1111/1468-0084.0610s1653
Pedroni, P. (2004). Panel cointegration; asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20(3), 597-625. https://doi.org/10.1017/S0266466604203073
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265-312. https://doi.org/10.1002/jae.951
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
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Association of Economists and Managers of the Balkans
- UdEkoM Balkan -
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