TAKING THE PUZZLE OUT OF THE PURCHASING POWER PARITY PUZZLE: AN APPLICATION IN RESPECT OF SOUTH AFRICA

This paper discusses two versions of the purchasing power parity puzzle. It presents the results of nonlinearity and nonstationarity tests in respect of the real exchange rates of the rand. It is found that the rand real exchange rate behaviour tends to be nonlinear and stationary in a majority of cases in the sample. This suggests that for the majority of the currencies in the sample, the real exchange rates of the rand are mean‐reverting, implying that the purchasing power parity relation holds in a nonlinear manner.