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Further evidence on the validity of purchasing power parity in selected African countries

E. N. Gyamfi () and E. F. Appiah ()
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E. N. Gyamfi: Ghana Institute of Management and Public Administration
E. F. Appiah: Central University

Journal of Economics and Finance, 2019, vol. 43, issue 2, 330-343

Abstract: Abstract This article extended previous studies on testing the validity of purchasing power parity (PPP) in 16 African countries between 1970 M01 and 2017 M01. We employed these approaches: first, we investigated for the presence of unit roots in the real exchange rates (RERs) using the nonlinear ADF unit root test and the modified Wald-type test under an exponential smooth threshold autoregressive (ESTAR) framework; second, we used the detrended fluctuation analysis (DFA) to find out if RERs were mean- reverting by analyzing Hurst estimates of the RERs in absolute form and in a rolling window form. Finally, we used a nonlinear cointegration rank and score test to investigate if nominal exchange rates and relative prices are cointegrated. Our findings showed that RERs of each of the 16 countries in absolute form had unit roots and were not mean reverting. Also, nominal exchange rates and relative prices were not cointegrated. These findings indicate strong evidence against PPP theory in these countries. We, therefore, cannot use PPP as a basis for determining equilibrium exchange rates for these 16 countries. However, a time-varying DFA method on RERs provided mixed conclusions about the validity of PPP in these countries.

Keywords: Purchasing power parity; Nonlinearity; Real exchange rates; Hurst exponent; Rolling window (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:spr:jecfin:v:43:y:2019:i:2:d:10.1007_s12197-018-9449-7