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

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  • MO Odedokun

Abstract

The paper reports empirical evidence on the fulfilment or otherwise of purchasing power parity (PPP) conditions in African countries, based on the popular augmented Dickey-Fuller test methodology that is used to identify whether the nominal exchange rate and price levels are co-integrated. The empirical analysis is based on quarterly data for the 1980(I)-1991(IV) period for 35 African countries and our finding is that the PPP conditions are met in 17 countries that are almost exclusively non-CFA zone members but are not met in the remaining 18 countries comprising nine non-CFA and nine CFA zone members. Given this lopsidedness in the distribution of countries where the conditions are met or not met between the two zones, it is inferred that certain macroeconomic features common to the CFA zone members but which are generally less pronounced in other countries might have been responsible for this finding. A number of such features relating to the extent of monetary growth, inflation rates, rate of depreciation of real and nominal exchange rates, domestic price variability, nominal exchange rate variability and the type of exchange rate system being operated were related to the tendency for PPP to be fulfilled across countries. But, while the direction of their observed effects are generally as expected, the effects do not exhibit statistical significance.

Suggested Citation

  • MO Odedokun, 2000. "Fulfilment of purchasing power parity conditions in Africa: the differential role of CFA and non-CFA membership," Journal of African Economies, Centre for the Study of African Economies, vol. 9(2), pages 213-234.
    • Handle: RePEc:oup:jafrec:v:9:y:2000:i:2:p:213-234.
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    File URL: http://hdl.handle.net/10.1093/jae/9.2.213
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    Cited by:

    1. Blaise Gnimassoun, 2017. "Exchange rate misalignments and the external balance under a pegged currency system," Review of International Economics, Wiley Blackwell, vol. 25(5), pages 949-974, November.
    2. Arize, Augustine C. & Malindretos, John & Nam, Kiseok, 2010. "Cointegration, dynamic structure, and the validity of purchasing power parity in African countries," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 755-768, October.
    3. Ahmad, Ahmad Hassan & Aworinde, Olalekan Bashir, 2016. "The role of structural breaks, nonlinearity and asymmetric adjustments in African bilateral real exchange rates," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 144-159.
    4. Joseph M. Kargbo, 2004. "Purchasing Power Parity And Exchange Rate Policy Reforms In Africa," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 258-281, June.
    5. K. Hassanain, 2004. "Purchasing Power Parity And Cross‐Sectional Dependency," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 238-257, June.
    6. Saint Kuttu, 2018. "Asymmetric mean reversion and volatility in African real exchange rates," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 575-590, July.
    7. M.Abimbola OYINLOLA & Luwatosin ADENIYI & Nd Festus O.EGWAIKHIDE*, 2011. "Purchasing Power Parity Hypothesis in the Selected African Countries," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 21, pages 93-110.
    8. Joakim Westerlund & Johan Blomquist, 2013. "A modified LLC panel unit root test of the PPP hypothesis," Empirical Economics, Springer, vol. 44(2), pages 833-860, April.
    9. Kargbo, Joseph M., 2003. "Cointegration Tests of Purchasing Power Parity in Africa," World Development, Elsevier, vol. 31(10), pages 1673-1685, October.
    10. Ricky Chee Jiun Chia & Shiok Ye Lim & Sheue Li Ong, 2014. "Long-Run Validity of Purchasing Power Parity and Cointegration Analysis for Low Income African Countries," Economics Bulletin, AccessEcon, vol. 34(3), pages 1438-1447.
    11. Arize, Augustine C. & Malindretos, John & Ghosh, Dilip, 2015. "Purchasing power parity-symmetry and proportionality: Evidence from 116 countries," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 69-85.
    12. Njindan Iyke, Bernard, 2015. "Real Exchange Rates Persistence in the West African Monetary Zone: A Revisit of the PPP Puzzle," MPRA Paper 67282, University Library of Munich, Germany.
    13. Blaise Gnimassoun, 2015. "Exchange rate misalignments and the external balance under a pegged currency system," Working Papers hal-04141421, HAL.

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