An Empirical Test of Purchasing Power Parity in Selected African Countries - a Panel Data Approach
AbstractThe paper tests whether the theory of Purchasing Power Parity holds in a selected sample of twenty African countries. The paper employs a panel unit root test to test whether the real exchange rates in the panel are mean reverting or not. The test employed is the Im et al (1997) test. Results show that the null of a unit root is rejected for the three real exchange rate indices, namely, the import-based and trade-weighted multilateral indices, and the bilateral indices, while for the export-based indices, the null hypothesis is not rejected. That is, Purchasing Power Parity is confirmed for the import-based and trade-weighted multilateral indices, and the bilateral indices, while it is rejected for the export-based multilateral indices. After performing the demeaning adjustment to account for cross-sectional dependence, our results show that the null hypothesis of a unit root is rejected for the import-based multilateral indices and the bilateral indices, while the null is not rejected for the trade-weighted multilateral indices. Purchasing Power Parity is therefore only confirmed for the import-based multilateral indices and bilateral indices, while it is rejected for the trade-weighted multilateral indices.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 39.
Length: 44 pages
Date of creation: 30 Apr 2001
Date of revision:
Contact details of provider:
Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
More information through EDIRC
Purchasing Power Parity; Real Exchange Rate; Africa; Panel Data;
Find related papers by JEL classification:
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O55 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Africa
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Frankel, Jeffrey A. & Rose, Andrew K., 1996.
"A panel project on purchasing power parity: Mean reversion within and between countries,"
Journal of International Economics,
Elsevier, vol. 40(1-2), pages 209-224, February.
- Jeffrey A. Frankel and Andrew K. Rose., 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," Center for International and Development Economics Research (CIDER) Working Papers C95-052, University of California at Berkeley.
- Frankel, Jeffrey A & Rose, Andrew K, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," CEPR Discussion Papers 1128, C.E.P.R. Discussion Papers.
- Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
- Oh, Keun-Yeob, 1996. "Purchasing power parity and unit root tests using panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 405-418, June.
- Coakley, Jerry & Kulasi, Farida, 1997. "Cointegration of long span saving and investment," Economics Letters, Elsevier, vol. 54(1), pages 1-6, January.
- Holmes, Mark J, 2000. "Does Purchasing Power Parity Hold in African Less Developed Countries? Evidence from a Panel Data Unit Root Test," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 9(1), pages 63-78, March.
- Pasaran, M.H. & Im, K.S. & Shin, Y., 1995.
"Testing for Unit Roots in Heterogeneous Panels,"
Cambridge Working Papers in Economics
9526, Faculty of Economics, University of Cambridge.
- Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002.
"Unit root tests in panel data: asymptotic and finite-sample properties,"
Journal of Econometrics,
Elsevier, vol. 108(1), pages 1-24, May.
- Tom Doan, . "LEVINLIN: RATS procedure to perform Levin-Lin-Chu test for unit roots in panel data," Statistical Software Components RTS00242, Boston College Department of Economics.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- O'Connell, Paul G. J., 1998. "The overvaluation of purchasing power parity," Journal of International Economics, Elsevier, vol. 44(1), pages 1-19, February.
- Kim, Yoonbai, 1990. "Purchasing Power Parity in the Long Run: A Cointegration Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 491-503, November.
- Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
- Patel, Jayendu, 1990. "Purchasing Power Parity as a Long-Run Relation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 367-79, Oct.-Dec..
- Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1996. "Current Account Solvency and the Feldstein-Horioka Puzzle," Economic Journal, Royal Economic Society, vol. 106(436), pages 620-27, May.
- Jorion, Philippe & Sweeney, Richard J., 1996. "Mean reversion in real exchange rates: evidence and implications for forecasting," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 535-550, August.
- Fisher, Eric O'N & Park, Joon Y, 1991. "Testing Purchasing Power Parity under the Null Hypothesis of Co-integration," Economic Journal, Royal Economic Society, vol. 101(409), pages 1476-84, November.
- Ken Froot & Kenneth Rogoff, .
"Perspectives on PPP and Long-Run Real Exchange Rates,"
32027, Harvard University OpenScholar.
- Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
- Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
- Rudiger Dornbusch, 1991. "Exchange Rates and Inflation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540606, December.
- Layton, Allan P. & Stark, Jonathan P., 1990. "Co-integration as an empirical test of purchasing power parity," Journal of Macroeconomics, Elsevier, vol. 12(1), pages 125-136.
- Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November.
- Lucio Sarno & Mark P. Taylor, .
"Real Exchange Rates under the Recent Float: Unequivocal Evidence of Mean Reversion,"
Economics and Finance Discussion Papers
97-14, Economics and Finance Section, School of Social Sciences, Brunel University.
- Sarno, Lucio & Taylor, Mark P., 1998. "Real exchange rates under the recent float: unequivocal evidence of mean reversion," Economics Letters, Elsevier, vol. 60(2), pages 131-137, August.
- Coakley, Jerry & Fuertes, Ana Maria, 1997. "New panel unit root tests of PPP," Economics Letters, Elsevier, vol. 57(1), pages 17-22, November.
- Lothian, James R., 1997. "Multi-country evidence on the behavior of purchasing power parity under the current float," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 19-35, February.
- Jun Nagayasu, 1998. "Does the Long-Run Ppp Hypothesis Hold for Africa? Evidence From Panel Co-Integration Study," IMF Working Papers 98/123, International Monetary Fund.
- MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, vol. 50(1), pages 7-11, January.
- Wu, Yangru, 1996. "Are Real Exchange Rates Nonstationary? Evidence from a Panel-Data Test," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 54-63, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie Andersson).
If references are entirely missing, you can add them using this form.