Purchasing power parity hypothesis in the selected African countries

This paper explore the long-run absolute purchasing power parity (PPP) hypothesis for a sample of 26 African countries, using both the univariate and the panel unit root tests on annual data for the period 1973-2008. The conventional unit root tests essentially failed to reject the null hypothesis o...

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Bibliographic Details
Published in:Pakistan journal of applied economics 2011-07, Vol.21 (1-2), p.93-110
Main Authors: Oyinlola, M Abimbola, Adeniyi, Oluwatosin, Egwaikhide, Festus O
Format: Article
Language:English
Subjects:
Africa
Exchange rates
International monetary economics
International monetary relations
International monetary system
Monetary policy
Panel data
Purchasing power parity
Unit root
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Summary:This paper explore the long-run absolute purchasing power parity (PPP) hypothesis for a sample of 26 African countries, using both the univariate and the panel unit root tests on annual data for the period 1973-2008. The conventional unit root tests essentially failed to reject the null hypothesis of a unit root in the real exchange rates of the countries which were investigated. Evidence, in favour of PPP for only 7 countries was found. Consequently, a volley of panel unit root tests was employed. The results demonstrated that the null of mean-reversion in the real exchange rates of all countries in the sample could not be rejected, implying a breakdown of the PPP in these countries. Therefore, it could be insightful to consider non-linear assessments of adjustment of the exchange rate towards its PPP trajectory. This threshold-type of analysis may convey information useful for policy making. Reprinted by permission of Applied Economics Research Centre
ISSN:0254-9204