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Does purchasing power parity hold following the launch of the euro? Evidence from the panel unit root test

Using a richer panel data set with more representative price indexes, this article adopts Pesaran's (2007) panel unit root test to study the validity of Purchasing Power Parity (PPP) across the eurozone countries both before and after the launch of the euro in 1999. We find that PPP holds before the introduction of the single currency, whereas it fails to hold after 1999. Our result is consistent with the finding in Engel and Rogers (2004) and Rogers (2007) that there is no longer a tendency to support the law of one price following the birth of the euro.