Foreign exchange markets and the purchasing power parity theory: Evidence from two Southern African countries
African Journal of Economic and Management Studies
ISSN: 2040-0705
Article publication date: 13 March 2017
Abstract
Purpose
The purpose of this paper is to examine the validity of the purchasing power parity (PPP) hypothesis for two Southern African countries, namely: Lesotho and Zambia.
Design/methodology/approach
The authors utilized four econometric tests to examine the existence of the PPP hypothesis in Lesotho and Zambia. These tests include two unit root tests without structural breaks – the Dickey-Fuller generalized least squares (DF-GLS) test and the Ng-Perron test; and two unit root tests with structural breaks – the Perron test and the Zivot-Andrews test. The authors’ empirical analysis is based on an annual data set with varying time periods. The sample period spanned 1960-2010 and 1955-2010, for Lesotho and Zambia, respectively.
Findings
The authors found that the PPP hypothesis was supported in the case of Lesotho, but rejected in the case of Zambia.
Originality/value
This paper is the first to simultaneously explore the exchange rate policies, trends, and the PPP for these two countries. The implication of this finding is that Lesotho is unlikely to profit immensely from trade and investment arbitrages; whereas Zambia is more likely to profit immensely from trade and investment arbitrage by trading with the USA. Moreover, the authors’ findings indicate that the PPP doctrine may be a useful guide for the exchange rate and other macroeconomic adjustment policies in Lesotho but not in Zambia.
Keywords
Acknowledgements
A previous version of this manuscript was presented at the 5th International Conference on Financial Services, Port Elizabeth, South Africa (29th September to 1st October 2015). The authors wish to thank conference participants, Professor Daniel Makina and two anonymous referees, for their helpful comments and suggestions. The authors take full responsibility for any remaining errors.
Citation
Iyke, B.N. and Odhiambo, N.M. (2017), "Foreign exchange markets and the purchasing power parity theory: Evidence from two Southern African countries", African Journal of Economic and Management Studies, Vol. 8 No. 1, pp. 89-102. https://doi.org/10.1108/AJEMS-03-2017-147
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited