Testing the validity of PPP theory for African countries

ABSTRACT

This study examines the purchasing power parity theory for 14 African countries by applying a recent composite time series method that incorporates the Fourier approximation. The structural breaks are modelled as a gradual smooth process by means of a Fourier component. The Fourier unit root test failed to find any evidence showing that real exchange rates for these 14 countries have mean-reverting tendencies. However, both cointegration and Fourier cointegration tests detect a stable long-term relation between the nominal exchange rate and relative price levels for 8 out of 14 countries; moreover, for five countries Fourier component in cointegration analysis is found to suit quite well.

KEYWORDS:

• Purchasing power parity
• Fourier unit root test
• Fourier cointegration test
• African countries

JEL CLASSIFICATION:

• C22
• C32
• F31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ To conserve space, we do not report the results of the FKPSS unit root test applied to the differences of the variables which show that all the variables are I(1), but are available from authors upon request.

² Note that since some countries (i.e. Burkina, Cameroon, Cote d’Ivoire, Niger, Senegal) use the same currency unit (CFA), the nominal exchange rate statistics estimated for these nations are identical.