African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 4092

Full Length Research Paper

Threshold effects in purchasing power parity for African Countries

Yu-Shao, Liu1, Meng-Nan, Zhu1 and Chi-Wei, Su2*
  1Department of Finance, Xiamen University, China. 2Department of International Trade, Tamkang University, Taipei, County 25137, Taiwan (R. O. C).
Email: [email protected]

  •  Accepted: 11 June 2010
  •  Published: 14 October 2011

Abstract

 

This study applies non-linear threshold unit-root test to assess the non-stationary properties of the real exchange rate for twenty African countries. We found that non-linear threshold unit-root test has higher power than linear method. As suggested by Caner and Hansen (2001), the true data generating process of exchange rate is a stationary non-linear process. We examine the validity of PPP from the non-linear point of view and provide robust evidence clearly indicating that purchasing power parity (PPP) holds true for six countries, namely; Egypt, Ethiopia, Gambia, Malawi, Seychelles and South Africa. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values  in a non-linear way.

 

Key words: Non-linear threshold unit-root test, purchasing power parity.