Cointegration,dynamic structure,and the validity of purchasing power parity in African countries |
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Authors: | Augustine C Arize John Malindretos Kiseok Nam |
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Institution: | 1. Department of Economics, Tshwane University of Technology, South Africa;2. Department of Economics, University of Pretoria, Pretoria 0002, South Africa;1. School of Economics of Sichuan University, Sichuan, China;2. Department of Investment & Insurance of Zhejiang Financial College, Zhejiang, China;3. Department of Tourism, Shih-Hsin University, Taipei, Taiwan;4. Department of Finance, Feng Chia University, Taichung, Taiwan |
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Abstract: | The purpose of this paper is to test the validity of the purchasing power parity (PPP) in Africa in the context of a multivariate error-correction model. This approach allows for the consideration of long-run elasticities as well as the dynamics of the short-run adjustment of exchange rates to changes in domestic and foreign prices. Monthly data for fourteen African countries are used, and the period examined is 1973:4 through 2007:7 (i.e., 412 observations). Results from long-run cointegration analysis, short-run error correction models, persistence profile analysis and variance decomposition all confirm the validity of PPP in these moderate-to-high inflation countries, where estimates of half-life deviations from PPP are found to be outside the range suggested by Rogoff (1996). |
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