Nonlinear adjustment to purchasing power parity in transition countries: the ADL test for threshold cointegration

Abstract

This study applies a newly developed Autoregressive Distributed Lag (ADL) test for threshold cointegration, proposed by Li and Lee (2010) to test the validity of long-run Purchasing Power Parity (PPP) for a sample of transition countries (i.e. Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Russia) over January 1995 to December 2008. The empirical results indicate that PPP only holds true for five of these transition countries under study. Our results have important policy implications for the transition countries under study.