Does the Long-Run PPP Hypothesis Hold for Africa? Evidence from Panel Co-Integration Study

This study tests for the consistency of the long-run purchasing power parity (PPP) hypothesis with the observed behavior of parallel market exchange rates for 16 African countries, using the panel co-integration method developed by Pedroni (1995). To test for long-run PPP is important for a number of reasons: many monetary models, à la Dornbusch (1976), hinge on the validity of long-run PPP theory, while many other macroeconomic models often use PPP to link domestic and foreign developments. Furthermore, although the PPP hypothesis may not be regarded as an explicit exchange rate theory, it may still serve to provide fundamental determinants that can be used to calculate the long-run exchange rates and assess the appropriate level of exchange rates when a long-run relationship exists.