PURCHASING POWER PARITY WITH RANK TESTS FOR NONLINEAR COINTEGRATION IN AFRICAN COUNTRIES

This study applies nonlinear cointegration to assess exchange rates with the corresponding relative prices and aggregate price levels for 20 African countries. We find that a nonparametric rank test has higher power than parametric testing procedures; a true data‐generating process of exchange rate...

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Bibliographic Details
Published in:The South African Journal of economics 2011-03, Vol.79 (1), p.17-26
Main Authors: Liu, Yu-shao, Su, Chi-wei
Format: Article
Language:English
Subjects:
C23
Cointegration analysis
Currencies
Economic equilibrium
Economic theory
Exchange rates
F31
Foreign exchange rates
Non-linear models
Nonlinear cointegration
nonparametric rank test
Purchasing power parity
South Africa
Studies
Test methods
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Summary:This study applies nonlinear cointegration to assess exchange rates with the corresponding relative prices and aggregate price levels for 20 African countries. We find that a nonparametric rank test has higher power than parametric testing procedures; a true data‐generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of purchasing power parity (PPP) from the nonparametric nonlinear point of view and provide robust evidence that clearly indicates PPP holds true for these countries. Hence, the long‐run African countries exchange rate adjustments are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis in a nonlinear way.
ISSN:0038-2280
1813-6982
DOI:10.1111/j.1813-6982.2011.01259.x