Purchasing power parity for 15 COMESA and SADC countries: evidence based on panel SURADF tests

Abstract

In this study, the panel Seemingly Unrelated Regressions Augmented Dickey–Fuller (SURADF) tests advanced by Breuer et al. (2001) are used to test the validity of Purchasing Power Parity (PPP) for 15 countries belonging to the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC) over the period of December 1994 to July 2008. The empirical results from the univariate unit root and panel-based unit root tests indicate that PPP does not hold for these 15 countries; however, Breuer et al.'s (2001) panel SURADF tests unequivocally indicate that PPP is valid for three of these 15 countries.

Acknowledgements

The authors are grateful to Professor Myles S. Wallace who kindly provided the RATS program codes. Any errors that remain are our own.

Notes

¹Other studies, see the work of Taylor (1995), MacDonald and Taylor (1992), Lothian and Taylor (2000, 2008), Taylor and Sarno (1998) and Taylor and Taylor (2004) who have provided in-depth information on the theoretical and empirical aspects of PPP and the real exchange rate.

²A number of studies have also provided solid empirical evidence for the nonlinear and/or asymmetric adjustment of the exchange rate. Reasons for the asymmetric adjustment are the presence of transaction costs that inhibit international goods arbitrage, and official intervention in the foreign exchange market may be such that nominal exchange rate movements are asymmetric (Taylor and Peel, 2000; Taylor, 2004; Juvenal and Taylor, 2008). Kilian and Taylor (2003) also suggested that nonlinearity may arise from the heterogeneity of opinion in the foreign exchange market concerning the equilibrium level of the nominal exchange rate: as the nominal rate takes on more extreme values, a great degree of consensus develops concerning the appropriate direction of exchange rate moves and traders act as accordingly.