PURCHASING POWER PARITY IN AFRICAN COUNTRIES: FURTHER EVIDENCE FROM FOURIER UNIT ROOT TESTS BASED ON LINEAR AND NONLINEAR MODELS

This paper examines the validity of purchasing power parity hypothesis for 33 African countries using recently developed Fourier unit root tests by Christopoulos and León‐Ledesma that account for the existence of multiple breaks in the real exchange rates. The results support the evidence of the PPP in 20 countries, showing that most of the real exchange rates in the selected countries are characterised by linear or nonlinear stationary around multiple temporary mean changes.     

DO AFRICAN COUNTRIES MOVE ASYMMETRICALLY TOWARDS PURCHASING POWER PARITY?

This paper investigates the possibility that the adjustment towards long‐run relative purchasing power parity (PPP) is dependent upon the nature of deviations from PPP that are experienced. While existing studies involving developed and less developed countries often find against PPP having employed linear tests of non‐stationarity or non‐cointegration, we employ a new cointegration test, recently advocated by Enders and Siklos and Enders and Dibooglu, that tests for an asymmetric adjustment towards parity with respect to positive and negative deviations of the real exchange rate from its equilibrium value. Using a sample often African economies with data taken from the post‐Bretton Woods floating exchange rate era, long‐run PPP holds in eight of these cases if an explicit distinction is made between positive and negative deviations. Across the sample, we find variation in the type of asymmetry experienced and the roles played by price and nominal exchange rate adjustment.     

Are Real GDP Levels Stationary in African Countries?

In this study, we apply flexible Fourier stationary unit root test proposed by Enders and Lee (2012) to assess the non‐stationary properties of the per capita real gross domestic product (GDP) for 32 African countries. We find that Fourier stationary unit root test has higher power than linear method if the true data‐generating process of per capita real GDP is in fact a stationary nonlinear process of an unknown form with structural change using the low frequency components. We investigate the stationarity of per capita real GDP from the nonlinear point of view and provide robust evidence that clearly indicates that real output is well characterised by a nonlinear, mean‐reverting process, namely Benin, Botswana, Burundi, Cameroon, Senegal, Sierra Leone and South Africa. Our evidence points that these seven countries are nonlinear stationary, implying that per capita real GDP follows a steady rate of growth, and policy innovations then have temporary effects. These results have important policy implications for African countries.     

Nonlinear Purchasing Power Parity under the Gold Standard

Hegwood and Papell (2002) conclude on the basis of analysis in a linear framework that long-run purchasing power parity (PPP) does not hold for 16 real exchange rate series, which were analyzed in Diebold. I lusted, and Rush (1991) for the period 1792-1913 under the Gold Standard. Rather, PPP deviations are mean-reverting to a changing equilibrium—a quasi PPP (QPPP) theory. We analyze the real exchange rate adjustment mechanism for their data set assuming a nonlinear adjustment process allowing for both a constant and a mean shifting equilibrium. Our results confirm that real exchange rates at that time were stationary, symmetric, nonlinear processes that revert to a nonconstant equilibrium rate. Speeds of adjustment were much quicker when breaks were allowed.     

Fulfilment of purchasing power parity conditions in Africa: the differential role of CFA and non-CFA membership

The paper reports empirical evidence on the fulfilment or otherwiseof purchasing power parity (PPP) conditions in African countries,based on the popular augmented Dickey-Fuller test methodologythat is used to identify whether the nominal exchange rate andprice levels are co-integrated. The empirical analysis is basedon quarterly data for the 1980(I)-1991(IV) period for 35 Africancountries and our finding is that the PPP conditions are metin 17 countries that are almost exclusively non-CFA zone membersbut are not met in the remaining 18 countries comprising ninenon-CFA and nine CFA zone members. Given this lopsidedness inthe distribution of countries where the conditions are met ornot met between the two zones, it is inferred that certain macroeconomicfeatures common to the CFA zone members but which are generallyless pronounced in other countries might have been responsiblefor this finding. A number of such features relating to theextent of monetary growth, inflation rates, rate of depreciationof real and nominal exchange rates, domestic price variability,nominal exchange rate variability and the type of exchange ratesystem being operated were related to the tendency for PPP tobe fulfilled across countries. But, while the direction of theirobserved effects are generally as expected, the effects do notexhibit statistical significance.     

Do Real Exchange Rates Follow a Nonlinear Mean Reverting Process in Developing Countries?

In an effort to fight relatively high inflation, many developing countries try to manage their nominal exchange rates through official intervention. In addition, developing countries tend to have high transportation costs, tariffs, and nontariff barriers. These factors are among the sources of generating nonlinearity in real exchange rates and hence some nonlinear adjustment toward purchasing power parity (PPP) in developing countries. In this paper, we employ monthly real effective exchange rate (REER) data of 88 developing countries and test the null of nonstationarity versus an alternative of linear stationarity by the means of a conventional unit root test and compare the results with those obtained from a new test in which the null is the same but the alternative hypothesis is nonlinear stationarity. The latter test supports the PPP theory in more developing countries compared with the former test, suggesting that nonlinear adjustment toward PPP in developing countries is an important phenomenon. Reported country characterizations indicate that reversion in REER occurs more often for high-inflation countries and for countries with high flexibility in their exchange rates.     

Long-Run Purchasing Power Parity with Asymmetric Adjustment

Tests of purchasing power parity (PPP) that use panel data are more supportive of the theory than are bilateral tests. The article uses threshold cointegration to explore long-run PPP. Using data from the post-Bretton Woods period, we show that cointegration with threshold adjustment holds for a number of European countries on a bilateral basis. Focusing on France and Germany as base countries, we show that the error-correction model has important nonlinear characteristics in that prices and the exchange rate have markedly different adjustment patterns for positive gaps from PPP than negative gaps.     

TESTING FOR PPP USING SADC REAL EXCHANGE RATES

This paper attempts to provide evidence indicating that the purchasing power parity (PPP) puzzle is becoming less of a puzzle. It present the results of Augmented Dickey–Fuller test, non-linear tests of non-stationarity and Bayesian unit root tests, applied to 10 Southern African Development Community countries. The Bayesian tests were found to be biased in favour of a trend stationary model in all cases. It is argued that non-linear approaches to exchange rate adjustments are likely to provide a firmer basis for inference and stronger support for the PPP in the long-term. This is more so at 1 and 5% levels of significance.     

PPP: <Emphasis Type="Italic">Delusion</Emphasis> or <Emphasis Type="Italic">Reality</Emphasis>? Evidence from a Nonlinear Analysis

In this paper we analyze the validity of the purchasing power parity (PPP) in a nonlinear framework using data for 18 bilateral US dollar exchange rates. Following Enders and Ludlow (2002), we use unit root and cointegration tests that do not assume a specific nonlinear adjustment. We find evidence of non-linear mean reversion in deviations from the PPP equilibrium in 11 out of 18 currencies. Additionally, to disentangle the respective contribution of exchange rate and prices to the adjustment toward the long run equilibrium, we estimate a Vector Error Correction Model. According to our empirical analysis, there exists a nonlinear mechanism to correct for deviation from the PPP equilibrium that comes mainly from the exchange rates. This is consistent with theoretical arguments on international goods markets under transaction costs as well as with an emerging strand of empirical literature. These results highlight the importance of neglecting the possibility of nonlinearity in the debate about the PPP and provide empirical evidence that supports the scenario of the PPP hypothesis as a reality.     

Price Indices and Nonlinear Mean-Reversion of Real Exchange Rates

The purpose of this article is to apply a symmetric band-threshold autoregressive model to investigate several interesting issues regarding purchasing power parity (PPP). We find that the nonlinear adjustment toward PPP is sensitive to price indices and is supported if a traded-goods real exchange rate is applied. Moreover, we also uncover the sources of the real exchange rate adjustments toward PPP. Finally, our evidence points out that the estimated half-life with a large shock, based on a generalized impulse response function, can be explained by nominal rigidities.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: EVIDENCE FROM PANEL SURADF TEST

This study reexamines the validity of long-run purchasing power parity (PPP) hypothesis using a battery of panel unit root tests for 11 developing countries in Africa over the period 1980-2007. Based on the conventional panel unit root tests, we found evidence that the monthly real exchange rates in these countries were mean reverting. By contrast, the series-specific unit root test proposed by Breuer et al. (SURADF) reveals that only six of the 11 RERs series were stationary using the US dollar as reference currency. Additionally, our results reveal that there is stronger evidence of the parity condition with the Rand-based rates than in the other currency-based rates like the US dollar or Euro. We conclude that PPP holds in some, but not all, of the African countries according to the SURADF tests.     

Purchasing Power Parity before and after the Adoption of the Euro

This paper examines the purchasing power parity (PPP) hypothesis for the post–Bretton Woods era including the period after the introduction of the euro. The study applies a new nonlinear unit root test to the bilateral real exchange rates (RERs) of both European and other industrial countries with the French franc and German mark (and the euro after 1998), as well as the US dollar as numeraire currencies. The results of the study provide stronger support for PPP than any earlier studies of bilateral PPP for industrial countries and suggest that (1) PPP tends to hold well within the European Union (EU) even before the adoption of the euro, (2) the evidence for PPP becomes more significant for both EU and non-EU countries when the sample period is extended to the euro era, and (3) convergence toward PPP between the EU countries, especially between the euro-area countries, tends to be nonlinear, while it is likely to be linear for the non-EU industrial countries. JEL no. F31, F33, G15, C22     

Food prices and long-run purchasing power parity in Africa

The purchasing power parity (PPP) theory is a cornerstone of exchange rate models in international economics. PPP is very important for two main reasons: first, it can serve as a prediction model for exchange rates, and second, it can serve as a benchmark in judging the level of exchange rate movements. This article utilised the Johansen cointegration technique in examining whether or not there is empirical support for long-run PPP in Africa. Annual data were used for exchange rates and food price indices in 25 countries covering the 1958-97 period. The empirical evidence showed strong support for long-run PPP in Africa, thereby providing wider acceptance for the applicability of PPP in exchange rate and other macroeconomic adjustment policies.     

Assessing convergence to purchasing power parity: A panel study for ten OECD countries

Assessing Convergence to Purchasing Power Parity: A Panel Study for 10 OECD Countries. — The paper analyzes whether post-Bretton Woods real exchange rates of ten OECD countries are nonstationary so that long-run purchasing power parity (PPP) can be considered to hold. A test procedure is proposed which treats the various real exchange rates as a panel but still allows to assess the rate of convergence to PPP for each pair of currencies separately. It is shown that long-run (tradables-) PPP holds between all countries analyzed. Rates of convergence to PPP, however, are found to be quite different across countries. For most of the OECD countries convergence takes place faster than previously indicated.     

The trend behavior of real exchange rates: Evidence from OECD countries

The Trend Behavior of Real Exchange Rates: Evidence from OECD Countries. — This paper examines the validity of purchasing power parity (PPP) under the current float using real effective exchange rates of eleven OECD countries. The author employs a test which allows for a one-time change in the intercept and/or in the slope of the trend function. The timing of the structural break is treated as unknown and is endogenously searched from the data. It is found that for a vast majority of countries, the real exchange rate can be characterized as a stationary process with a broken trend. The paper provides support for PPP in the long run.     

ON THE RAND: DETERMINANTS OF THE SOUTH AFRICAN EXCHANGE RATE

This paper is an econometric investigation of the determinants of the real value of the South African rand over the period 1984‐2007. The results show a relatively good fit. As always with exchange rate equations, there is substantial weight on the lagged exchange rate, which can be attributed to a momentum component. Nevertheless, economic fundamentals are significant and important. This is especially true of an index of the real prices of South African mineral commodities, which even drives out real income as a significant determinant. An implication is that the 2003‐2006 real appreciation of the rand can be attributed to the Dutch Disease. In other respects, the rand behaves like currencies of industrialised countries with well‐developed financial markets. In particular, high South African interest rates raise international demand for the rand and lead to real appreciation, controlling also for a forward‐looking measure of expected inflation and a measure of default risk or country risk.     

Nonlinear adjustment to purchasing power parity for ASEAN countries

This study applies a simple and powerful nonlinear unit root test, proposed by Sollis (2009), to test the validity of long-run purchasing power parity (PPP) in a sample of ASEAN countries. The empirical results indicate that PPP only holds for three of these ASEAN countries studied, and the adjustment toward PPP is found to be nonlinear and asymmetric.     

Purchasing Power Parity in High-Inflation Countries: A Cointegration Analysis of Integrated Variables with Trend Breaks

This paper examines the long-run validity of purchasing power parity (PPP) for four high-inflation countries. The method of Zivot and Andrews (1992) is employed to detect the time-series behavior of the exchange rates and consumer price indices of these countries. We find that these variables are integrated with some trend breaks. We then utilize these data to test PPP using Johansen's (1988) multivariate cointegration technique. The cointegration tests are conducted with the correction of the finite sample bias and the adjustment for trend breaks. The results are consistent with the argument that, during the recent floating exchange-rate period, PPP holds well, at least in a weak form, in high-inflation countries where the general price level movement overshadows the factors causing deviations from PPP.     

Purchasing Power Parity in Developing Countries: Multi-Period Evidence Under the Current Float

Using panel unit root tests, we examine purchasing power parity (PPP) for US dollar real exchange rates of developing countries during the current floating rate period. Since evidence of PPP may vary from period to period, we examine the data for moving 10-year periods from 1976–85 up to 1990–99. We organize panels based on country characteristics influencing the validity of PPP. Those characteristics include openness, inflation, and the level and growth rate of per capita GDP. Although we find stronger evidence of PPP after 1980, our examination of panel data over 15 10-year periods yields only limited support for PPP.     

Testing PPP for the South African Rand/US Dollar Real Exchange Rate at Different Data Frequencies

This paper tests the PPP hypothesis for the South African rand/US dollar real exchange rate using a fractional integration framework. The results suggest that the real exchange rate of the South African rand with respect to the US dollar is a highly dependent variable with an order of integration very close to 1. This finding is not affected by the data frequency considered (daily, weekly or monthly). Also, there appears to be a single break in December 2001 (possibly corresponding to a change in the monetary policy framework), with the unit root null being rejected in favour of d > 1 for the periods before the break, but not afterwards. Thus, our results strongly reject the PPP hypothesis for the South African rand/US dollar rate across data frequencies, since shocks are found to affect the exchange rate forever.