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ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES

Year 2015, Volume: 7 Issue: 1, 39 - 56, 01.06.2015

Abstract

Substantial amount of studies have examined the validity of mean-reversion on the real exchange rate. However very limited studies of this nature have been conducted in Sub-Saharan Africa countries, particularly energy exporting countries, hence this study endeavors to find evidence for or against the mean- reversion of the real exchange rate. There is, however inadequate data required for the statistical significance for Sub-Saharan African currencies. Hence this study uses a panel of 5 energy exporting countries, i.e. South Africa, Mozambique, Congo Republic, Nigeria and Angola, to examine the validity of the purchasing power parity. Relying on the Im, Pesaran and Shin and the Fisher ADF proposed panel unit root tests the study fails to reject the null hypothesis of a unit root when small sample size is employed however by extending sample size and employing different price index, i.e. traded goods prices instead of GDP deflators the study reject the null hypothesis of a unit root and hence concludes the purchasing power parity holds in Sub-Saharan African energy exporting countries considered in the study

References

  • Acaravci, A., & Ozturk, I. (2010). Testing purchasing power parity in transition countries: evidence from structural breaks. Amfiteatru economic, 12(27), 190-198.
  • Akinboade, O. A., & Makina, D. (2006). Mean reversion and structural breaks in real exchange rates: South African evidence. Applied financial economics, 16(4), 358.
  • Amano, R. A., & Van Norden, S. (1995). Terms of trade and real exchange rates: the Canadian evidence. Journal of International Money and Finance, 14(1), 83
  • Cassel, G. (1918). Abnormal deviations in international exchanges. The Economic Journal, 413-415.
  • Arize, A. C., Malindretos, J., & Nam, K. (2010). Cointegration, dynamic structure, and the validity of purchasing power parity in African countries.
  • International Review of Economics & Finance, 19(4), 755-768. Bekő, J., & Boršič, D. (2007). Purchasing power parity in transition economies: does it hold in the Czech Republic, Hungary and Slovenia?. Post-communist economies, 19(4), 417-432.
  • Breitung, J., & Pesaran, M. H. (2008). Unit roots and cointegration in panels (pp. 322). Springer Berlin Heidelberg.
  • Chang, T., Lu, Y. C., Tang, D. P., & Liu, W. C. (2011). Long-run purchasing power parity with asymmetric adjustment: further evidence from African countries. Applied Economics, 43(2), 231-242.
  • Chen, Y. C., & Rogoff, K. (2003). Commodity currencies. Journal of International Economics, 60(1), 133-160.
  • Chen, Y. C., Rogoff, K., & Rossi, B. (2008). Can exchange rates forecast commodity prices? (No. w13901). National Bureau of Economic Research.
  • Chen, S. L., & Wu, J. L. (2000). A re-examination of purchasing power parity in
  • Japan and Taiwan. Journal of Macroeconomics, 22(2), 271-284. Chiu, R. L. (2002). Testing the purchasing power parity in panel data.
  • International Review of Economics & Finance, 11(4), 349-362. Choudhry, T. (1999). Purchasing power parity in high-inflation Eastern European countries: Evidence from fractional and Harris-Inder cointegration tests. Journal of macroeconomics, 21(2), 293-308.
  • Coakley, J., & Fuertes, A. M. (1997). New panel unit root tests of PPP.
  • Economics Letters, 57(1), 17-22. Cushman, D. O. (2008). Long-run PPP in a system context: No favorable evidence after all for the US, Germany, and Japan. Journal of International
  • Financial Markets, Institutions and Money, 18(5), 413-424. Darby, M. (1981), Does purchasing power parity work ?, Proceedings of the Fifth
  • West Coast Academic/Federal Reserve Economic Research Seminar, Federal Reserve Bank of San Francisco Dauvin, M. (2014). Energy prices and the real exchange rate of commodity- exporting countries. International Economics, 137, 52-72.
  • Dimitriou, D., & Simos, T. (2013). Testing purchasing power parity for Japan and the US: A structural-break approach. Japan and the World Economy, 28, 53-59.
  • Doğanlar, M., Bal, H., & Özmen, M. (2009). Testing long-run validity of purchasing power parity for selected emerging market economies. Applied
  • Economics Letters, 16(14), 1443-1448.
  • Frankel, J. (2007). On the rand: Determinants of the South African exchange rate.
  • South African Journal of Economics, 75(3), 425-441. Edison, H. J., Gagnon, J. E., & Melick, W. R. (1997). Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era.
  • Journal of International Money and Finance, 16(1), 1-17.mm Frenkel, J. A. (1981). The collapse of purchasing power parities during the 1970's.
  • European Economic Review, 16(1), 145-165. Frenkel, J. A. (1981). Flexible exchange rates, prices, and the role of" news": lessons from the 1970s. The Journal of Political Economy, 665-705.
  • Frankel, J. A., & Rose, A. K. (1996). A panel project on purchasing power parity: mean reversion within and between countries. Journal of International Economics, 40(1), 209-224.
  • Ghiba, N. (2011). Purchasing Power Parity influence on real exchange rate behavior in Romania. CES Working Papers, (4), 524-536.
  • Ghiba, N., & Sadoveanu, D. (2012). Testing Purchasing Power Parity in Romania using standard unit root tests, with one structural break and cointegration analysis.
  • Romanian Economic Journal, 15(44), 225-242. Gregory, A. W., & Hansen, B. E. (1996). Practitioners corner: tests for cointegration in models with regime and trend shifts. Oxford bulletin of
  • Economics and Statistics, 58(3), 555-560. He, H., Ranjbar, O., & Chang, T. (2013). Purchasing power parity in transition countries: Old wine with new bottle. Japan and the World Economy, 28, 24-32.
  • Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of econometrics, 115(1), 53-74.
  • Kargbo, J. M. (2003). Cointegration tests of purchasing power parity in Africa.
  • World Development, 31(10), 1673-1685.
  • Kim, H., & Moh, Y. K. (2010). A century of purchasing power parity confirmed:
  • The role of nonlinearity. Journal of International Money and Finance, 29(7), 1405.
  • Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of econometrics, 108(1), 1-24.
  • Lothian, J. R. (1997). Multi-country evidence on the behavior of purchasing power parity under the current float. Journal of International Money and Finance, (1), 19-35.
  • Lopez, C., Murray, C. J., & Papell, D. H. (2005). State of the art unit root tests and purchasing power parity. Journal of Money, Credit, and Banking, 37(2), 361
  • MacDonald, R. (1996). Panel unit root tests and real exchange rates. Economics Letters, 50(1), 7-11.
  • McNown, R., & Wallace, M. S. (1989). National price levels, purchasing power parity, and cointegration: a test of four high inflation economies. Journal of
  • International Money and Finance, 8(4), 533-545. Meese, R. A., & Rogoff, K. (1983). Empirical exchange rate models of the seventies: Do they fit out of sample?. Journal of international economics, 14(1), 24.
  • Meese, R., & Rogoff, K. (1983). The out-of-sample failure of empirical exchange rate models: sampling error or misspecification?. In Exchange rates and international macroeconomics (pp. 67-112). University of Chicago Press.
  • Mishkin, F. S. (1984). Are real interest rates equal across countries? An empirical investigation of international parity conditions. The Journal of Finance, 39(5), 1357.
  • Oh, K. Y. (1996). Purchasing power parity and unit root tests using panel data.
  • Journal of International Money and Finance, 15(3), 405-418. Papell, D.H. (1995), Searching for stationarity: Purchasing power parity under the current float, unpublished.
  • Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and statistics, 61(S1), 670.
  • Pedroni, P. (2004). Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric theory, 20(03), 597-625.
  • Pigott, C., & Sweeney, R. J. (1985). Purchasing power parity and exchange rate dynamics: some empirical results. Arndt, SW, Sweeney, RJ and Willett, T. Mass.: Bellinger.
  • Rogoff, K. (1996). The purchasing power parity puzzle. Journal of Economic literature, 647-668.
  • Roll, R. (1979). Violations of purchasing power parity and their implications for efficient international commodity markets. International finance and trade, 1(6).
  • Rogoff, K. (1999). Monetary models of dollar/yen/euro nominal exchange rates: dead or undead?. The Economic Journal, 109(459), 655-659.
  • Wei, S. J., & Parsley, D. C. (1995). Purchasing power disparity during the floating rate period: exchange rate volatility, trade barriers and other culprits (No. w5032).
  • National Bureau of Economic Research Taylor, A. M. (2002). A century of purchasing-power parity. Review of economics and statistics, 84(1), 139-150.
  • Taylor, M. P. (2003). Purchasing power parity. Review of International Economics, 11(3), 436-452.
  • Taylor, A. M., & Taylor, M. P. (2004). The purchasing power parity debate (No. w10607). National Bureau of Economic Research.
  • Taylor, M. P. (2006). Real exchange rates and purchasing power parity: mean- reversion in economic thought. Applied Financial Economics, 16(1-2), 1-17.
  • Wu, YANo-Ru, 'Are real exchange rates nonstationary?' Unpublished manuscript, Wu, Y. (1996). Are real exchange rates nonstationary? Evidence from a panel- data test. Journal of Money, Credit and Banking, 54-63.
  • Xu, B. (2003). Trade liberalization, wage inequality, and endogenously determined nontraded goods. Journal of International Economics, 60(2), 417-431.
  • Xu, Z. (2003). Purchasing power parity, price indices, and exchange rate forecasts. Journal of International Money and Finance, 22(1), 105-130.
Year 2015, Volume: 7 Issue: 1, 39 - 56, 01.06.2015

Abstract

References

  • Acaravci, A., & Ozturk, I. (2010). Testing purchasing power parity in transition countries: evidence from structural breaks. Amfiteatru economic, 12(27), 190-198.
  • Akinboade, O. A., & Makina, D. (2006). Mean reversion and structural breaks in real exchange rates: South African evidence. Applied financial economics, 16(4), 358.
  • Amano, R. A., & Van Norden, S. (1995). Terms of trade and real exchange rates: the Canadian evidence. Journal of International Money and Finance, 14(1), 83
  • Cassel, G. (1918). Abnormal deviations in international exchanges. The Economic Journal, 413-415.
  • Arize, A. C., Malindretos, J., & Nam, K. (2010). Cointegration, dynamic structure, and the validity of purchasing power parity in African countries.
  • International Review of Economics & Finance, 19(4), 755-768. Bekő, J., & Boršič, D. (2007). Purchasing power parity in transition economies: does it hold in the Czech Republic, Hungary and Slovenia?. Post-communist economies, 19(4), 417-432.
  • Breitung, J., & Pesaran, M. H. (2008). Unit roots and cointegration in panels (pp. 322). Springer Berlin Heidelberg.
  • Chang, T., Lu, Y. C., Tang, D. P., & Liu, W. C. (2011). Long-run purchasing power parity with asymmetric adjustment: further evidence from African countries. Applied Economics, 43(2), 231-242.
  • Chen, Y. C., & Rogoff, K. (2003). Commodity currencies. Journal of International Economics, 60(1), 133-160.
  • Chen, Y. C., Rogoff, K., & Rossi, B. (2008). Can exchange rates forecast commodity prices? (No. w13901). National Bureau of Economic Research.
  • Chen, S. L., & Wu, J. L. (2000). A re-examination of purchasing power parity in
  • Japan and Taiwan. Journal of Macroeconomics, 22(2), 271-284. Chiu, R. L. (2002). Testing the purchasing power parity in panel data.
  • International Review of Economics & Finance, 11(4), 349-362. Choudhry, T. (1999). Purchasing power parity in high-inflation Eastern European countries: Evidence from fractional and Harris-Inder cointegration tests. Journal of macroeconomics, 21(2), 293-308.
  • Coakley, J., & Fuertes, A. M. (1997). New panel unit root tests of PPP.
  • Economics Letters, 57(1), 17-22. Cushman, D. O. (2008). Long-run PPP in a system context: No favorable evidence after all for the US, Germany, and Japan. Journal of International
  • Financial Markets, Institutions and Money, 18(5), 413-424. Darby, M. (1981), Does purchasing power parity work ?, Proceedings of the Fifth
  • West Coast Academic/Federal Reserve Economic Research Seminar, Federal Reserve Bank of San Francisco Dauvin, M. (2014). Energy prices and the real exchange rate of commodity- exporting countries. International Economics, 137, 52-72.
  • Dimitriou, D., & Simos, T. (2013). Testing purchasing power parity for Japan and the US: A structural-break approach. Japan and the World Economy, 28, 53-59.
  • Doğanlar, M., Bal, H., & Özmen, M. (2009). Testing long-run validity of purchasing power parity for selected emerging market economies. Applied
  • Economics Letters, 16(14), 1443-1448.
  • Frankel, J. (2007). On the rand: Determinants of the South African exchange rate.
  • South African Journal of Economics, 75(3), 425-441. Edison, H. J., Gagnon, J. E., & Melick, W. R. (1997). Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era.
  • Journal of International Money and Finance, 16(1), 1-17.mm Frenkel, J. A. (1981). The collapse of purchasing power parities during the 1970's.
  • European Economic Review, 16(1), 145-165. Frenkel, J. A. (1981). Flexible exchange rates, prices, and the role of" news": lessons from the 1970s. The Journal of Political Economy, 665-705.
  • Frankel, J. A., & Rose, A. K. (1996). A panel project on purchasing power parity: mean reversion within and between countries. Journal of International Economics, 40(1), 209-224.
  • Ghiba, N. (2011). Purchasing Power Parity influence on real exchange rate behavior in Romania. CES Working Papers, (4), 524-536.
  • Ghiba, N., & Sadoveanu, D. (2012). Testing Purchasing Power Parity in Romania using standard unit root tests, with one structural break and cointegration analysis.
  • Romanian Economic Journal, 15(44), 225-242. Gregory, A. W., & Hansen, B. E. (1996). Practitioners corner: tests for cointegration in models with regime and trend shifts. Oxford bulletin of
  • Economics and Statistics, 58(3), 555-560. He, H., Ranjbar, O., & Chang, T. (2013). Purchasing power parity in transition countries: Old wine with new bottle. Japan and the World Economy, 28, 24-32.
  • Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of econometrics, 115(1), 53-74.
  • Kargbo, J. M. (2003). Cointegration tests of purchasing power parity in Africa.
  • World Development, 31(10), 1673-1685.
  • Kim, H., & Moh, Y. K. (2010). A century of purchasing power parity confirmed:
  • The role of nonlinearity. Journal of International Money and Finance, 29(7), 1405.
  • Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of econometrics, 108(1), 1-24.
  • Lothian, J. R. (1997). Multi-country evidence on the behavior of purchasing power parity under the current float. Journal of International Money and Finance, (1), 19-35.
  • Lopez, C., Murray, C. J., & Papell, D. H. (2005). State of the art unit root tests and purchasing power parity. Journal of Money, Credit, and Banking, 37(2), 361
  • MacDonald, R. (1996). Panel unit root tests and real exchange rates. Economics Letters, 50(1), 7-11.
  • McNown, R., & Wallace, M. S. (1989). National price levels, purchasing power parity, and cointegration: a test of four high inflation economies. Journal of
  • International Money and Finance, 8(4), 533-545. Meese, R. A., & Rogoff, K. (1983). Empirical exchange rate models of the seventies: Do they fit out of sample?. Journal of international economics, 14(1), 24.
  • Meese, R., & Rogoff, K. (1983). The out-of-sample failure of empirical exchange rate models: sampling error or misspecification?. In Exchange rates and international macroeconomics (pp. 67-112). University of Chicago Press.
  • Mishkin, F. S. (1984). Are real interest rates equal across countries? An empirical investigation of international parity conditions. The Journal of Finance, 39(5), 1357.
  • Oh, K. Y. (1996). Purchasing power parity and unit root tests using panel data.
  • Journal of International Money and Finance, 15(3), 405-418. Papell, D.H. (1995), Searching for stationarity: Purchasing power parity under the current float, unpublished.
  • Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and statistics, 61(S1), 670.
  • Pedroni, P. (2004). Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric theory, 20(03), 597-625.
  • Pigott, C., & Sweeney, R. J. (1985). Purchasing power parity and exchange rate dynamics: some empirical results. Arndt, SW, Sweeney, RJ and Willett, T. Mass.: Bellinger.
  • Rogoff, K. (1996). The purchasing power parity puzzle. Journal of Economic literature, 647-668.
  • Roll, R. (1979). Violations of purchasing power parity and their implications for efficient international commodity markets. International finance and trade, 1(6).
  • Rogoff, K. (1999). Monetary models of dollar/yen/euro nominal exchange rates: dead or undead?. The Economic Journal, 109(459), 655-659.
  • Wei, S. J., & Parsley, D. C. (1995). Purchasing power disparity during the floating rate period: exchange rate volatility, trade barriers and other culprits (No. w5032).
  • National Bureau of Economic Research Taylor, A. M. (2002). A century of purchasing-power parity. Review of economics and statistics, 84(1), 139-150.
  • Taylor, M. P. (2003). Purchasing power parity. Review of International Economics, 11(3), 436-452.
  • Taylor, A. M., & Taylor, M. P. (2004). The purchasing power parity debate (No. w10607). National Bureau of Economic Research.
  • Taylor, M. P. (2006). Real exchange rates and purchasing power parity: mean- reversion in economic thought. Applied Financial Economics, 16(1-2), 1-17.
  • Wu, YANo-Ru, 'Are real exchange rates nonstationary?' Unpublished manuscript, Wu, Y. (1996). Are real exchange rates nonstationary? Evidence from a panel- data test. Journal of Money, Credit and Banking, 54-63.
  • Xu, B. (2003). Trade liberalization, wage inequality, and endogenously determined nontraded goods. Journal of International Economics, 60(2), 417-431.
  • Xu, Z. (2003). Purchasing power parity, price indices, and exchange rate forecasts. Journal of International Money and Finance, 22(1), 105-130.
There are 58 citations in total.

Details

Other ID JA52EG33SU
Journal Section Articles
Authors

Ntokozo Patrick Nzimande This is me

Publication Date June 1, 2015
Published in Issue Year 2015 Volume: 7 Issue: 1

Cite

APA Nzimande, N. P. (2015). ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES. International Journal of Economics and Finance Studies, 7(1), 39-56.
AMA Nzimande NP. ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES. IJEFS. June 2015;7(1):39-56.
Chicago Nzimande, Ntokozo Patrick. “ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES”. International Journal of Economics and Finance Studies 7, no. 1 (June 2015): 39-56.
EndNote Nzimande NP (June 1, 2015) ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES. International Journal of Economics and Finance Studies 7 1 39–56.
IEEE N. P. Nzimande, “ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES”, IJEFS, vol. 7, no. 1, pp. 39–56, 2015.
ISNAD Nzimande, Ntokozo Patrick. “ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES”. International Journal of Economics and Finance Studies 7/1 (June 2015), 39-56.
JAMA Nzimande NP. ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES. IJEFS. 2015;7:39–56.
MLA Nzimande, Ntokozo Patrick. “ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES”. International Journal of Economics and Finance Studies, vol. 7, no. 1, 2015, pp. 39-56.
Vancouver Nzimande NP. ON THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM ENERGY EXPORTING SUB-SAHARAN AFRICA COUNTRIES. IJEFS. 2015;7(1):39-56.