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On the Validity of Purchasing Power Parity (PPP): The Case of Sierra Leone

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  • Jabbie, Mohamed
  • Jackson, Emerson Abraham

Abstract

This paper attempts to empirically validate the purchasing power parity (PPP) theory in the context of Sierra Leone. To achieve this objective, cointegration and error correction techniques were utilised to account for both long and short-run dynamics over the period 2007Q1 to 2019Q1. The Engel-Granger cointegration technique was utilised to ascertain the long-run relationship between the exchange rate and the price differential between Sierra Leone and the United States of America, while the redundant variable test was used to attain the parsimonious short-run error correction model. The results indicated a cointegrating relationship, while the coefficient on the price differential was greater than one (1), reflecting that the PPP does not hold for Sierra Leone. Moreover, the short-run results showed a rejection of the theory and rather endorses the presence of depreciation inertia, where past depreciation of the exchange rate is a major determinant of its current depreciating trend.

Suggested Citation

  • Jabbie, Mohamed & Jackson, Emerson Abraham, 2020. "On the Validity of Purchasing Power Parity (PPP): The Case of Sierra Leone," MPRA Paper 110659, University Library of Munich, Germany, revised 05 Jun 2020.
  • Handle: RePEc:pra:mprapa:110659
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    References listed on IDEAS

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    4. Christopher E.S. Warburton & Emerson Abraham Jackson, 2020. "Monetary Policy Responses to Exogenous Perturbations: The Case of a Small Open Economy (2007-2018)," PSL Quarterly Review, Economia civile, vol. 73(293), pages 181-201.
    5. Kallon, Kelfala M, 1994. "An Econometric Analysis of Inflation in Sierra Leone," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 3(2), pages 199-230, October.
    6. Jackson, Emerson Abraham, 2020. "Understanding SLL / US$ exchange rate dynamics in Sierra Leone using Box-Jenkins ARIMA approach," MPRA Paper 97965, University Library of Munich, Germany, revised 03 Jan 2020.
    7. Adu, Raymond & Litsios, Ioannis & Baimbridge, Mark, 2019. "Real exchange rate and asymmetric shocks in the West African Monetary Zone (WAMZ)," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 232-249.
    8. Jackson, Emerson Abraham & Tamuke, Edmund & Jabbie, Mohamed, 2019. "Disaggregated Short-Term Inflation Forecast (STIF) for Monetary Policy Decision in Sierra Leone," MPRA Paper 96735, University Library of Munich, Germany, revised 26 Nov 2019.
    9. Akay, Alpaslan & Brausmann, Alexandra & Djajic, Slobodan & Kirdar, Murat Güray, 2018. "Purchasing-Power-Parity and the Saving Behavior of Temporary Migrants," IZA Discussion Papers 11679, Institute of Labor Economics (IZA).
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    Cited by:

    1. Muhammad Zakaria & Seemab Tanveer & Bashir Ahmad Fida & Muhammad Iftikhar ul Husnain, 2023. "Inflation Differential Pass-Through to Exchange Rate: Some Evidence From Pakistan," SAGE Open, , vol. 13(4), pages 21582440231, December.
    2. Jackson, Emerson Abraham, 2024. "Economic Theory of Inflation," EconStor Preprints 280999, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    Purchasing Power Parity; Exchange Rate; Inflation; Cointegration; Sierra Leone;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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