Testing the validity of PPP theory for African countries |
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Authors: | Veli Y?lanc? Murat Aslan |
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Institution: | 1. Financial Econometrics, Sakarya University, Sakarya, Turkey;2. Economics, Ankara Y?ld?r?m Beyaz?t University, Ankara, Turkey |
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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. |
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Keywords: | Purchasing power parity Fourier unit root test Fourier cointegration test African countries |
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