An Empirical Test of Purchasing Power Parity in Selected African Countries - a Panel Data Approach

Beatrice Kalinda Mkenda
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Beatrice Kalinda Mkenda: Department of Economics, School of Economics and Commercial Law, Göteborg University, Postal: , Box 640, SE 405 30 GÖTEBORG

No 39, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: The paper tests whether the theory of Purchasing Power Parity holds in a selected sample of twenty African countries. The paper employs a panel unit root test to test whether the real exchange rates in the panel are mean reverting or not. The test employed is the Im et al (1997) test. Results show that the null of a unit root is rejected for the three real exchange rate indices, namely, the import-based and trade-weighted multilateral indices, and the bilateral indices, while for the export-based indices, the null hypothesis is not rejected. That is, Purchasing Power Parity is confirmed for the import-based and trade-weighted multilateral indices, and the bilateral indices, while it is rejected for the export-based multilateral indices. After performing the demeaning adjustment to account for cross-sectional dependence, our results show that the null hypothesis of a unit root is rejected for the import-based multilateral indices and the bilateral indices, while the null is not rejected for the trade-weighted multilateral indices. Purchasing Power Parity is therefore only confirmed for the import-based multilateral indices and bilateral indices, while it is rejected for the trade-weighted multilateral indices.

Keywords: Purchasing Power Parity; Real Exchange Rate; Africa; Panel Data (search for similar items in EconPapers)
JEL-codes: C33 F43 O55 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2001-04-30
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Citations: View citations in EconPapers (4)

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