Validity of Purchasing Power Parity (PPP) Hypothesis in the Ecowas (1980–2017)

Abstract

This study investigates the validity of a purchasing power parity (PPP) hypothesis in the ECOWAS. Secondary data on real exchange rates, domestic inflation rates, and foreign inflation rates were sourced from the World Development Indicators of the World Bank (2018). Unit root tests, Panel unit root tests, and panel cointegration tests were used to investigate the validity of the PPP hypothesis in the ECOWAS. The study found that the PPP hypothesis is valid individually in all the ECOWAS member countries. The results from the panel unit root tests also confirm the validity of the PPP hypothesis in the ECOWAS. Specifically, the LLC with individual intercept ( t = −5.97117, p < 0.0000), IPS with individual intercept ( t = −3.30564; p < 0.0000), Fisher ADF with individual intercept ( t = −3.43996; p < 0.0003), and Fisher PP with individual intercept ( t = −5.91557; p < 0.0000) while the panel cointegration test rejects the validity of the PPP hypothesis. Therefore, the study suggests that the ECOWAS can cautiously forge ahead with the implementation of their economic integration policies and programs in the sub-region.