The role of structural breaks, nonlinearity and asymmetric adjustments in African bilateral real exchange rates

- We investigate the validity of the purchasing power parity, PPP using data from six African countries.
- The methodology used accounted for structural breaks, established cointegration and asymmetric adjustments.
- We found that accommodating the structural breaks improves the obtained results in supporting the PPP.
- Taking care of non-linearity and asymmetric adjustments in the series provided further support for the PPP.

This paper examines the validity of the purchasing power parity, PPP for six African countries of Botswana, Ghana, Kenya, Nigeria, South Africa and Tanzania using the countries' bilateral real exchange rates with their fifteen major trading partners for the period 1960-2011. It uses the Lagrangian multiplier, LM, which accommodates up to two endogenous structural breaks in addition to conventional unit root tests. The paper also uses the threshold cointegration tests to explore nonlinearity and asymmetric adjustments of the series. Results from the LM unit root tests indicate that the exchange rates of Botswana, Ghana, Kenya and Nigeria relative to their major trading partners are stationary. The results from the threshold cointegration suggest that there is a long-run relationship between the series and that the adjustments are asymmetric. Appreciation is faster than depreciation in most of the countries. This is consistent with suggestions that countries are intolerant of depreciation.