Testing the validity of PPP theory for African countries


Yilanci V. , ASLAN M., Ozguer O.

APPLIED ECONOMICS LETTERS, vol.25, no.18, pp.1273-1277, 2018 (Journal Indexed in SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 25 Issue: 18
  • Publication Date: 2018
  • Doi Number: 10.1080/13504851.2017.1418066
  • Title of Journal : APPLIED ECONOMICS LETTERS
  • Page Numbers: pp.1273-1277
  • Keywords: Purchasing power parity, Fourier unit root test, Fourier cointegration test, African countries, C22, C32, F31, PURCHASING POWER PARITY, FOURIER FLEXIBLE FORM, UNIT-ROOT TEST, SMOOTH BREAKS, LONG-RUN, COINTEGRATION, SERIES

Abstract

This study examines the purchasing power parity theory for 14 African countries by applying a recent composite time series method that incorporates the Fourier approximation. The structural breaks are modelled as a gradual smooth process by means of a Fourier component. The Fourier unit root test failed to find any evidence showing that real exchange rates for these 14 countries have mean-reverting tendencies. However, both cointegration and Fourier cointegration tests detect a stable long-term relation between the nominal exchange rate and relative price levels for 8 out of 14 countries; moreover, for five countries Fourier component in cointegration analysis is found to suit quite well.