Purchasing power parity puzzle:evidence from Ghana

This paper tests the validity of Purchasing Power Parity (PPP) doctrine for Ghana using the conventional relative PPP equation. We conducted a univariate Augmented Dickey-Fuller unit root test on the model variables. Exchange rate and CPI data for Ghana and the USA were collected on annual basis for the period between 1970 and 2005 inclusive. The result of the PPP test shows non-rejection of the null hypothesis of the failure of PPP. The result of the unit root test suggests that Ghana's exchange rates are mean reverting. Exchange rates and inflation differentials were found to be stationary at the same order of integration. Consequently, cointegration is suspected between GHANEX and GHANINF, though this paper did not investigate the presence of cointegration because even if it exists, we conclude that there is a long-run relationship between the two variables. Based on the result, it is concluded that a common basket of goods, when quoted in either cedi or dollar is not expected to cost the same in both countries. From the policy point of view, we established that PPP can be used to assess the level of exchange rates.