Fulfilment of purchasing power parity conditions in Africa: the differential role of CFA and non-CFA membership

The paper reports empirical evidence on the fulfilment or otherwise of purchasing power parity (PPP) conditions in African countries, based on the popular augmented Dickey-Fuller test methodology that is used to identify whether the nominal exchange rate and price levels are co-integrated. The empirical analysis is based on quarterly data for the 1980(I)-1991(IV) period for 35 African countries and our finding is that the PPP conditions are met in 17 countries that are almost exclusively non-CFA zone members but are not met in the remaining 18 countries comprising nine non-CFA and nine CFA zone members. Given this lopsidedness in the distribution of countries where the conditions are met or not met between the two zones, it is inferred that certain macroeconomic features common to the CFA zone members but which are generally less pronounced in other countries might have been responsible for this finding. A number of such features relating to the extent of monetary growth, inflation rates, rate of depreciation of real and nominal exchange rates, domestic price variability, nominal exchange rate variability and the type of exchange rate system being operated were related to the tendency for PPP to be fulfilled across countries. But, while the direction of their observed effects are generally as expected, the effects do not exhibit statistical significance.