Non-linear quantile unit root test and PPP: more evidence from Africa

ABSTRACT

It is now a common practice to establish stationarity of the real exchange rate as a sign of purchasing power parity (PPP) hypothesis. In this article, we consider the real effective exchange rates of 29 African countries. When we apply conventional linear unit root tests, we find support for the PPP in eight countries. However, when we shift to the newly introduced non-linear quantile unit root test, support for the PPP increases to 15 countries.

KEYWORDS:

• Non-linear quantile unit root
• PPP
• 29 African nations

JEL CLASSIFICATION:

• F31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Empirical literature differs from one region to another mostly due to harmonized path of prices and similar macro policies within each region. For example, PPP is supported more in Latin America due to high rate of inflation as compared with low inflation Europe.

² The outcome was much better when Bahmani-Oskooee and Ranjbar (2016) applied the quantile unit root test to 23 OECD countries and found support in 15 cases.

³ For more evidence of non-linearity in the real exchange rates, see Bahmani-Oskooee and Das (1985), Michael, Nobay, and Peel (1997), Taylor, Peel, and Sarno (2001), and Taylor (2003).

⁴ While the main source of data is Bahmani-Oskooee and Kones (2014), this source is supplemented by International Financial Statistics of the IMF as well as by the Federal Reserve Bank of New York web site: (www.economagic.com/fedny.htm) to extend the data and to add more countries. We have adjusted the data to make them compatible and consistent.