Purchasing power parity in transition countries: Old wine with new bottle

- We test the long-run PPP for a sample of transition countries.
- Sequential Panel Selection Method (SPSM) procedure using the Panel KSS unit root test with a Fourier function.
- The results indicate that the PPP holds true for more than half of these transition countries studied.
- The findings have important policy implications for the transition countries.

This study questions whether the long-run purchasing power parity (PPP) holds in the transition economies (Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romanian, and Russia) for the period from January 1995 to October 2011. We employ the Sequential Panel Selection Method (SPSM) procedure using the Panel KSS unit root test with a Fourier function, a novel approach to panel unit root testing. The SPSM approach classifies the whole panel into a group of stationary and non-stationary series and is able to account for structural breaks, nonlinearity, and cross-section dependence. The results indicate that the PPP holds true for more than half of these transition countries studied, with the exception of Hungarian, the Czech Republic and the Russia. The findings have important policy implications for the transition countries.