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Periodical article Periodical article Leiden University catalogue Leiden University catalogue WorldCat catalogue WorldCat
Title:Does Purchasing Power Parity Hold in African Less Developed Countries? Evidence from a Panel Data Unit Root Test
Author:Holmes, Mark J.
Year:2000
Periodical:Journal of African Economies
Volume:9
Issue:1
Period:March
Pages:63-78
Language:English
Geographic term:Africa
Subjects:exchange rates
consumer prices
Economics and Trade
External link:https://jae.oxfordjournals.org/content/9/1/63.full.pdf
Abstract:The hypothesis of relative purchasing power parity (PPP) argues that the percentage change in the nominal spot exchange rate between two currencies should equal the inflation differential between the respective countries. PPP is of potential interest to policymakers in less developed countries (LDCs) as a prediction model for exchange rates and a criterion for over and undervaluation of currencies. Moreover, the quality of policy advice advice may depend on the validity of PPP. This study tests for long-run relative PPP in 27 LDCs in Africa using quarterly data for the period 1974-1997 and employing a new methodology utilizing a panel data unit root test. PPP is generally confirmed and there is evidence that PPP is more prevalent in the case of high inflation LDCs. The calculated half-life of a one-off random shock to parity is of the order of six quarters and is slightly less than existing calculations for developed countries. General confirmation of these findings is provided by the 1960-1973 period. Bibliogr., notes, ref., sum.
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