Working Papers in Economics
No 39:
An Empirical Test of Purchasing Power Parity in Selected African Countries - a Panel Data Approach
Beatrice Kalinda Mkenda
Abstract: The paper tests whether the theory of Purchasing Power
Parity holds in a selected sample of twenty African countries. The paper
employs a panel unit root test to test whether the real exchange rates in
the panel are mean reverting or not. The test employed is the Im et al
(1997) test. Results show that the null of a unit root is rejected for the
three real exchange rate indices, namely, the import-based and
trade-weighted multilateral indices, and the bilateral indices, while for
the export-based indices, the null hypothesis is not rejected. That is,
Purchasing Power Parity is confirmed for the import-based and
trade-weighted multilateral indices, and the bilateral indices, while it is
rejected for the export-based multilateral indices. After performing the
demeaning adjustment to account for cross-sectional dependence, our results
show that the null hypothesis of a unit root is rejected for the
import-based multilateral indices and the bilateral indices, while the null
is not rejected for the trade-weighted multilateral indices. Purchasing
Power Parity is therefore only confirmed for the import-based multilateral
indices and bilateral indices, while it is rejected for the trade-weighted
multilateral indices.
Keywords: Purchasing Power Parity; Real Exchange Rate; Africa; Panel Data; (follow links to similar papers)
JEL-Codes: C33; F43; O55; (follow links to similar papers)
44 pages, April 30, 2001
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