Purchasing Power Parity in CEE and Post-War Former Yugoslav States

In this paper we investigate purchasing power parity in the CEE and post-war former Yugoslav countries during the EU integration process in 1994-2006. This work stems from longer-term tests of real exchange rate convergence in the former Yugoslavia. This period is of interest on two fronts: first, it investigates real exchange dynamics in the aftermath of a war financed in part through seigniorage; and second, we investigate the level of economic integration with the European Union following the breakup of the former Yugoslavia. Given the short-run nature of the available data we use both univariate and panel unit root tests with and without structural breaks. The results suggest that there is statistical evidence that real exchange rates between the eight transition countries and Germany are stationary when breaks are accounted for. Given the size of nominal shocks in the region, particularly in the early 1990s, estimates indicate that convergence to the long-run equilibrium is relatively quick.