Purchasing Power Parity in African Countries: Evidence from the Sequential Panel Selection Method

Application of new methodological advances to Africa either does not exist or is always with substantial delay, mostly due to lack of data. In this paper, we use the newly constructed real effective exchange rates of twenty African countries over the current floating rate period of 1971Q1-2012Q4 and test the well-known Purchasing Power Parity (PPP) theory by applying Panel Kapitanios-Shin-Snell unit root test through the sequential panel selection method. This method classifies the whole panel into a group of stationary and non-stationary series and hence identifies how many and which series in the panel are stationary processes. Our empirical results indicate that PPP holds only in three of twenty African countries under study.