2017•AIP conference proceedingsRequires access

Testing for purchasing power parity in 21 African countries using several unit root tests

Niri Martha Choji, Siok Kun Sek

Abstract

Purchasing power parity is used as a basis for international income and expenditure comparison through the exchange rate theory. However, empirical studies show disagreement on the validity of PPP. In this paper, we conduct the testing on the validity of PPP using panel data approach. We apply seven different panel unit root tests to test the validity of the purchasing power parity (PPP) hypothesis based on the quarterly data on real effective exchange rate for 21 African countries from the period 1971: Q1-2012: Q4. All the results of the seven tests rejected the hypothesis of stationarity meaning that absolute PPP does not hold in those African Countries. This result confirmed the claim from previous studies that standard panel unit tests fail to support the PPP hypothesis.

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Key concepts: Purchasing power parity, Relative purchasing power parity, Unit root, Econometrics, Unit root test, Economics, Panel data, Parity (physics)