Abstract
African policy makers have being implementing exchange rate policy reforms based on the assumption that long-run PPP holds in Africa. This study conducted a detailed empirical investigation to ascertain whether or not there is empirical support for long-run PPP in African countries. Because of the significant black market premium, we applied Johansen's cointegration method to annual data on official and black market exchange rates, and the GDP deflators of 40 countries covering the 1958–2003 period. The research shows overwhelming support for long-run PPP in Africa, thus, PPP is a reliable guide for exchange rate determination and exchange rate policy reform in African countries.
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