PURCHASING POWER PARITY AND COINTEGRATION: EVIDENCE FROM LATVIA AND SLOVAKIA

This paper deals with the analysis of the purchasing power parity between Latvia and the euro area and between Slovakia and the euro area using the Engle-Granger and Johansen co-integration techniques. Latvia and Slovakia became members of the European Union in May 2004 and have been already the members of the Exchange Rate Mechanism II (ERM II) preparing for the euro adoption. The whole analysis was done on monthly data covering the period January 1999 - May 2008. Both the Engle-Granger and the Johansen method did not confirmed the purchasing power parity (PPP) validity in both analysed cases.