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Testing for the purchasing power parity (PPP) hypothesis between South Africa and its main trading partners: application of the quantile approach

Hendriks, Johannes Jurgens and Bonga-Bonga, Lumengo (2022): Testing for the purchasing power parity (PPP) hypothesis between South Africa and its main trading partners: application of the quantile approach.

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Abstract

This paper tests whether the PPP theory holds between trading partners, depending on the volume of trade and trade friction, such as exchange control. The test is applied between South Africa, a country that applies an exchange control policy, and its trading partners. The paper uses the quantile unit root test and quantile cointegration regression approach to test for the strong and weak-form PPP hypothesis. Strong evidence of the weak-form PPP hypothesis is found for high export countries over all quantiles. Specifically, weak-form PPP is found in China, the United States, Japan and the United Kingdom, whereas evidence of PPP, in general, was found to be lacking. The paper finds evidence that PPP is more likely to exist between countries with more significant trade volumes.

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