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Cointegration, dynamic structure, and the validity of purchasing power parity in African countries

  • Arize, Augustine C.
  • Malindretos, John
  • Nam, Kiseok
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    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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    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 19 (2010)
    Issue (Month): 4 (October)
    Pages: 755-768

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    Handle: RePEc:eee:reveco:v:19:y:2010:i:4:p:755-768
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