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PURCHASING POWER PARITY WITH RANK TESTS FOR NONLINEAR COINTEGRATION IN AFRICAN COUNTRIES
Author(s) -
Liu Yushao,
Su Chiwei
Publication year - 2011
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/j.1813-6982.2011.01259.x
Subject(s) - purchasing power parity , cointegration , nonparametric statistics , economics , econometrics , exchange rate , nonlinear system , rank (graph theory) , parametric statistics , financial economics , mathematics , macroeconomics , statistics , physics , quantum mechanics , combinatorics
This study applies nonlinear cointegration to assess exchange rates with the corresponding relative prices and aggregate price levels for 20 African countries. We find that a nonparametric rank test has higher power than parametric testing procedures; a true data‐generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of purchasing power parity (PPP) from the nonparametric nonlinear point of view and provide robust evidence that clearly indicates PPP holds true for these countries. Hence, the long‐run African countries exchange rate adjustments are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis in a nonlinear way.