Panel asymmetric nonlinear unit root test and PPP in Africa

ABSTRACT

This study revisits purchasing power parity (PPP) theory for 20 African countries using panel asymmetric nonlinear unit root test proposed by Emirmahmutoglu and Omay (2014), through the sequential panel selection method of Chortareas and Kapetanios (2009). While standard panel unit root tests fail to support the PPP, the empirical results from panel asymmetric nonlinear unit root test do support the PPP. However, additional tests reveal that support in all 20 African countries is mostly due to stationarity of the real effective exchange rates of Ghana and Rwanda where the adjustment process towards equilibrium is nonlinear and asymmetric.

KEYWORDS:

• Purchasing power parity
• African countries
• panel asymmetric unit root test
• nonlinearity

JEL CLASSIFICATION:

• C22
• F31

Acknowledgement

The authors thank Dr Emirmahmutoglu for providing the Matlab codes to run the tests.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Old studies that used regression analysis regressed the nominal exchange rate on relative prices and tried to verify the purchasing power parity by showing that the intercept is 0 and slope is 1.

² For more details, see Baum, Barkoulas, and Caglayan (2001), Taylor, Peel, and Sarno (2001) and Sollis (2009).

³ For example, Sollis, Leybourne, and Newbold (2002) find evidence suggesting that asymmetric nonlinear mean reversion is an important feature of data on real exchange rates against the US dollar.

⁴ For details, see Emirmahmutoglu and Omay (2014).

⁵ Details of these statistics are outlined by Emirmahmutoglu and Omay (2014, pp. 186–187).

⁶ For details about the SPSM procedure, see Bahmani-Oskooee, Chang, and Hung (2013, 2014b).

⁷ For some other PPP- and exchange-rate-related studies, see Ahking (1997), Apergis (1998), Arize, Malindretos, and Christoffersen (2003), Baffoe-Bonnie (2004), Beach, Kruse, and Uri (1993), Bleaney (1992), Bwo-Nung (1996), Carrion-I-Silvestre, Del Barrio, and Lopez-Bazo (2004), Enders and Chumrusphonlert (2004), Hojman (1989), Holmes (2002), Horne (2004), Jenkins (2004), Jung (1995), MacDonald, Allen, and Cruickshank (2002), Moosa (1994), Nachane (1997), Narayan (2005), Peel and Venetis (2003), Sjolander (2007) and Baharumshah and Borsic (2008).