Purchasing Power Parity in African Countries: Evidence From Panel Suradf Test

Abstract

This study reexamines the validity of long-run purchasing power parity (PPP) hypothesis using a battery of panel unit root tests for 11 developing countries in Africa over the period 1980-2007. Based on the conventional panel unit root tests, we found evidence that the monthly real exchange rates in these countries were mean reverting. By contrast, the series-specific unit root test proposed by Breuer et al. (SURADF) reveals that only six of the 11 RERs series were stationary using the US dollar as reference currency. Additionally, our results reveal that there is stronger evidence of the parity condition with the Rand-based rates than in the other currency-based rates like the US dollar or Euro. We conclude that PPP holds in some, but not all, of the African countries according to the SURADF tests. JEL Classification: F31, C22, C23

Purchasing Power Parity in African Countries: Further Evidence From Fourier Unit Root Tests Based on Linear and Nonlinear Models

“…It is worth noting that the results of this study differ from those obtained by Bahmani‐Oskooee and Gelan (2006), Doganlar et al . (2009) and Baharumshah et al . (2010), most probably due to the differences in the employed econometric methodologies and time span.…”

“…The PPP theory can also be used to compare the average costs of goods and services between markets and plays an important role in the choice between money, inflation or exchange rate targeting in the formulation of monetary policy as stated by Baharumshah et al . (2010).…”

“…Using quarterly data, he found that the PPP is generally confirmed between 1974 and 1997. Baharumshah et al . (2010) used monthly data over the period 1980‐2007 and investigated the PPP hypothesis using a battery of panel unit root tests.…”

Real exchange rates persistence in the West African monetary zone: a revisit of the PPP puzzle

“…Yet the trade and exchange rate reforms in this region are largely driven by PPP-based frameworks (see World Bank, 1996;Kargbo, 2003a). The representative studies of the PPP hypothesis in the WAMZ region include Adler and Lehman (1983), Madhavi and Zhou (1994), Nagayasu (1998), Salehizadeh and Taylor (1999), Holmes (2000), Odedokun (2000), Kargbo (2003aKargbo ( , 2003bKargbo ( , and 2004, Alagidede et al (2008), and Baharumshah et al (2010). As in studies on other countries, the findings from these representative studies are also conflicting.…”

“…Finally, Baharumshah et al (2010) also study the long-run PPP hypothesis using panel data stationarity tests for 11 African countries which include Ghana and Nigeria. These authors utilize conventional panel data stationarity techniques, as well as a series-specific stationarity technique; the seemingly unrelated regressions augmented Dickey-Fuller (SURADF) proposed by Breuer et al (2002), to examine the long-run PPP in these countries.…”