On the Validity of Purchasing Power Parity (PPP): The Case of Sierra Leone

Mohamed Jabbie and Emerson Jackson

MPRA Paper from University Library of Munich, Germany

Abstract: This paper attempts to empirically validate the purchasing power parity (PPP) theory in the context of Sierra Leone. To achieve this objective, cointegration and error correction techniques were utilised to account for both long and short-run dynamics over the period 2007Q1 to 2019Q1. The Engel-Granger cointegration technique was utilised to ascertain the long-run relationship between the exchange rate and the price differential between Sierra Leone and the United States of America, while the redundant variable test was used to attain the parsimonious short-run error correction model. The results indicated a cointegrating relationship, while the coefficient on the price differential was greater than one (1), reflecting that the PPP does not hold for Sierra Leone. Moreover, the short-run results showed a rejection of the theory and rather endorses the presence of depreciation inertia, where past depreciation of the exchange rate is a major determinant of its current depreciating trend.

Keywords: Purchasing Power Parity; Exchange Rate; Inflation; Cointegration; Sierra Leone (search for similar items in EconPapers)
JEL-codes: C32 E41 F31 (search for similar items in EconPapers)
Date: 2020-01-01, Revised 2020-06-05
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Advanced Studies in Finance 1(21).11(2020): pp. 18-27

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:110659

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