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Long-Run Validity of Purchasing Power Parity and Cointegration Analysis for Low Income African Countries

Author

Listed:
  • Ricky Chee Jiun Chia

    (Labuan Faculty of International Finance, Universiti Malaysia Sabah.)

  • Shiok Ye Lim

    (Labuan Faculty of International Finance, Universiti Malaysia Sabah.)

  • Sheue Li Ong

    (Faculty of Science and Natural Resources, Universiti Malaysia Sabah.)

Abstract

Studies on long-run purchasing power parity based on rank test for nonlinear cointegration is limited. Therefore, to formally examine if nonlinear purchasing power parity really exist in the selected low-income African countries, the current study revisits the long-run validity of purchasing power parity by using the rank tests advanced by Breitung (2011), which is not only capable in the detection of cointegration, but can further distinguish linear from nonlinear relationship if cointegration exists. In addition, this study also follows the suggestion by Liew et al. (2012) to solve the rank problem in testing the PPP hypothesis. Results from the analysis indicate that nominal exchange rates and relative prices are cointegrated in Burundi, Madagascar, Malawi and Uganda. However, further analysis only found the existence of nonlinear cointegration in Burundi.

Suggested Citation

  • Ricky Chee Jiun Chia & Shiok Ye Lim & Sheue Li Ong, 2014. "Long-Run Validity of Purchasing Power Parity and Cointegration Analysis for Low Income African Countries," Economics Bulletin, AccessEcon, vol. 34(3), pages 1438-1447.
    • Handle: RePEc:ebl:ecbull:eb-13-00663
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Nonlinearity; Cointegration; Rank Tests; Purchasing Power Parity;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G1 - Financial Economics - - General Financial Markets

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