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Nonlinear Econometric Approaches in Testing PPP of SADC Economies towards Monetary Union

Mulatu F. Zerihun, Marthinus C. Breitenbach and Francis Kemegue
Authors registered in the RePEc Author Service: Mulatu Fekadu Zerihun () and Marthinus Christoffel Breitenbach ()

No 420, Working Papers from Economic Research Southern Africa

Abstract: The theory of purchasing power parity implies that real exchange rate series should be stationary. However, conventional unit root tests on the Southern African Development community (SADC) real exchange rates confirm the existence of a unit root. Such deficiencies in the investigation of the dynamics of real exchange rates in the region calls for nonlinear methods like the method used in this study to be pursued, which may better explain the dynamics of real exchange rates in SADC. In this paper two nonlinearity tests are employed: the nonparametric test developed by Brock, Dechert, and Scheinkman - known as the BDS test and the Fourier stationarity test. The BDS test detects the independent and identically distribute (iid) assumption of the time series used in the analysis while the Fourier approximation mimics a wide variety of breaks and other types of nonlinearities. Both tests confirm the non-linear nature of real exchange series in SADC. The result from the Fourier stationarity test further provides strong evidence of an OCA among the 11 SADC countries included in the study

Keywords: Optimal Currency Area (OCA); Purchasing Power Parity (PPP); Real Exchange Rate; Fourier Stationarity Test; BDS Test (search for similar items in EconPapers)
JEL-codes: C22 C32 F31 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2014
New Economics Papers: this item is included in nep-afr and nep-opm
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