Purchasing power parity in the long run : an empirical re-evaluation of the South African evidence

Abstract

Purchasing Power Parity is a very important equilibrium concept in macroeconomics. Although the concept of purchasing power parity equilibrium is widely used in the academic, public and business sector, the actual existence purchasing power equilibrium beween countries is widely debated. The continuous development of methods to analyse the properties of time series data has contributed to this debate. In this paper, the purchasing power parity equilibrium between South Africa and its major trading partners is tested with some of the recent methods to analyse whether time series data converges towards equilibrium. The conclusion that is reached is that a purchasing power parity equilibrium do exist in the long run, but that this equilibrium breaks down over the short run.