|Abstract:||The main purpose of the master´s thesis is to analyse the validity of purchasing power parity (PPP) in the chosen European transition countries. Although the PPP theory is considered a simple theory, it is difficult to actualize it in reality, since there are many restrictions contradicting its validity. In addition to basic restriction factors arising from international trade, there are numerous other factors, specific for transition countries. These countries distinguish from other West European countries because they carried out a transition from strictly centralized countries to market-oriented countries. Therefore, they experienced numerous economic changes. Thus, the actual shocks originating in the nature of their economic transformation, influenced the movement of the real exchange rate, and therefore contributed to deviation from validity of the PPP.
Analysis of validity of the PPP theory was performed for six EU Member States, which so far have not adopted Euro as their currency, namely Bulgaria, the Czech Republic, Croatia, Hungary, Poland, and Romania. We used time series stationarity tests, namely ADF and KPSS tests. The basis of the analysis is represented by the calculated data series on the real exchange rates. The basic currencies used were US dollar and Euro. At first, the validity of the PPP was checked for the entire period of observation, which encompassed monthly data from 1995 to 2015 in the case of use of US dollar, and from 1996 to 2015 in the case of use of Euro. The entire period was divided into two sub periods dependent on individual country´s entrance in the European Union. The first period therefore included the period from the beginning of the observation to the country´s entrance in the European Union, and the second period included the period from country´s entrance in the Union to the end of the observation period.
When considering the entire observation period, we did not manage to find extensive evidence in favour of the PPP´s validity in the chosen countries, in particular in the period of the use of US dollar as a basic currency. The results are somewhat more encouraging in the sub periods, since we were able to prove validity of the PPP in some cases. We also established that Euro as a reference currency in the PPP plays a more important role than US dollar, especially after entrance of these countries in the European Union.|