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Should the CNB Devaluate the Exchange Rate? Evidence from Purchasing Power Parity (CROSBI ID 564060)

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Tkalec, Marina ; Vizek, Maruška Should the CNB Devaluate the Exchange Rate? Evidence from Purchasing Power Parity // 16th Dubrovnik Economic Conference, Young Economists´ Seminar Dubrovnik, Hrvatska, 23.06.2010-25.06.2010

Podaci o odgovornosti

Tkalec, Marina ; Vizek, Maruška

engleski

Should the CNB Devaluate the Exchange Rate? Evidence from Purchasing Power Parity

In this paper we explore the validity of the purchasing power parity hypothesis in the case of Croatia. We use the bilateral HRK/EUR exchange rate and test it jointly with the price level of purchasing power parity in Croatia and the eurozone. Because the literature suggests that the purchasing power parity is a valid long-run international parity condition which incorporates asymmetric properties, we use two cointegration methods: Johansen cointegration that assumes symmetry in both the short and long run, and threshold cointegration which allows for asymmetric adjustment in the short run. The results of Johansen cointegration suggest that in the long run the absolute power parity condition holds, which in turn means that the exchange rate is aligned with the fundamentals and no depreciation is needed. In the short run, only the exchange rate adjusts to deviations from the parity, while the price level in Croatia and the eurozone are weakly exogenous. The error correction model does not confirm the existence of exchange rate pass-through to domestic consumer prices. The results of threshold cointegration suggest that the adjustment of deviations from the purchasing power parity is not asymmetric.

purchasing power parity; cointegration; threshold adjustment; Croatia

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Podaci o prilogu

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Podaci o skupu

16th Dubrovnik Economic Conference, Young Economists´ Seminar

pozvano predavanje

23.06.2010-25.06.2010

Dubrovnik, Hrvatska

Povezanost rada

Ekonomija

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