Purchasing Power Parity for African Countries: The Impact of the 2007-2008 “Great Recession”

Abstract

We investigate both the weak and strong forms of PPP between 33 African countries, the United States, Euro area, South Africa, and Nigeria. The study applies panel unit root tests, panel cointegration tests, panel granger causality test and the panel fully modified OLS models to quarterly CPI and nominal exchange rate data for the period 1995Q1-2014Q4. We find great support for the weak form of PPP and a persistent bi-causal relationship between the nominal exchange rates and the respective price differences between the African countires and reference countries. Support for a strong form of PPP occurs, however, in the post-recession era for the U.S. dollar and the British pound. When we break the data into pre and post-recession, we find a unidirectional causality for the South African rand, pound, and euro in some cases.