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Testing for PPP Using SADC Real Exchange Rates

Author

Listed:
  • Thabo Mokoena

    () (South African Reserve Bank, Pretoria)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

  • Renee van Eyden

    () (Department of Economics, University of Pretoria)

Abstract

This paper attempts to provide evidence indicating that the Purchasing Power Parity (PPP) puzzle is becoming less of a puzzle. It present the results of Augmented Dickey-Fuller (ADF) test, nonlinear tests of nonstationarity, and Bayesian unit root tests, applied to ten SADC countries. The Bayesian tests were found to be biased in favour of a trend stationary model in all cases. It is argued that nonlinear approaches to exchange rate adjustments are likely to provide a firmer basis for inference and stronger support for the PPP in the long-term. This is more so at 1 per cent and 5 per cent levels of significance.

Suggested Citation

  • Thabo Mokoena & Rangan Gupta & Renee van Eyden, 2008. "Testing for PPP Using SADC Real Exchange Rates," Working Papers 200822, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:200822
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    References listed on IDEAS

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    1. Richard M. Todd, 1984. "Improving economic forecasting with Bayesian vector autoregression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    2. Rangan Gupta, 2006. "FORECASTING THE SOUTH AFRICAN ECONOMY WITH VARs AND VECMs," South African Journal of Economics, Economic Society of South Africa, vol. 74(4), pages 611-628, December.
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    Citations

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    Cited by:

    1. Thabo M. Mokoena & Gupta, R. & Van Eyden, R., 2009. "Half-Life Deviations from PPP in the South African Development Community (SADC)," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).
    2. Mulatu F. Zehirun & Marthinus C. Breitenbach & Francis M. Kemegue, 2015. "Assessment of Monetary Union in SADC: Evidence from Cointegration and Panel Unit Root Tests," Working Papers 201502, University of Pretoria, Department of Economics.
    3. Mehmet Balcilar & Rangan Gupta & Charl Jooste, 2014. "Is the Rand Really Decoupled from Economic Fundamentals?," Working Papers 201439, University of Pretoria, Department of Economics.
    4. Zerihun, Mulatu F. & Breitenbach, Marthinus C., 2016. "Nonlinear approaches in testing PPP: Evidence from Southern African development community," Economic Modelling, Elsevier, vol. 56(C), pages 162-167.
    5. Riané de Bruyn & Rangan Gupta & Lardo Stander, 2013. "Testing the Monetary Model for Exchange Rate Determination in South Africa: Evidence from 101 Years of Data," Contemporary Economics, University of Finance and Management in Warsaw.

    More about this item

    Keywords

    Purchasing Power Parity; Nonlinear Nonstationarity Tests; Bayesian Unit Root Test;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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