Sub-Sahara’s Experience with the Purchasing Power Parity Hypothesis

Abstract

For a panel of 19 Sub-Sahara African countries, annual data are used to carry out an empirical investigation of the main tenet of the Purchasing Power (PPP) Hypothesis. After a brief examination of recent inflation and direction of trade data, OLS techniques are used to establish an initial link between inflation differentials (for the panel with the five primary industrialized countries) and changes in the bilateral nominal exchange rates. Following an ADF unit root test, the Johansen cointegration technique is used to search for a stable long term relationship for these variables that would provide support for the PPP. There is at best modest support for the premise that aggressive fiscal and monetary policies aimed at combating high inflation can guarantee a stable currency.