Testing Purchasing Power Parity for the New EU Members and Turkey : A Panel Cointegration Analysis with Disaggregated CPI

This study applies multivariate panel cointegration technique to evaluate purchasing power parity (PPP) hypothesis by using consumer price sub-indices of new EU member transition economies and Turkey. We aim not only to compare the parameter estimates across the sectors of an economy but also across the economies at different EU transition stages. We find that failure to get evidence for cointegration to support PPP can be attributed to the inclusion of non-tradable goods in the aggregated data. Inclusion of Turkey into the group of transition countries strengthens the test results in favor of weak form PPP. That verifies the significance of the extent of trade relationship as one of the requisite for the PPP hypothesis to hold