An Empirical Analysis of Purchasing Power Parity: A Case Study of Two Anglophone Ecowas Members

ABSTRACT

This paper tests the validity of Purchasing Power Parity (PPP) hypothesis for two

Anglophone ECOWAS members, Nigeria and Ghana. The researcher tested the relative

PPP equation. It also employed the ADF univariate Unit Root test for the stationarity of

the exchange rates of each of the countries. Exchange rates and CPIs data for all

countries were collected on annual basis for the period between 1970 and 2005. The

results show the non-rejection of the null hypothesis of the failure of PPP for both

countries. The results of the unit root tests show that exchange rates of both countries

follow mean reversion. Their respective exchange rates and inflation d~flerentialsw ere

found to be stationary at the same order of integration. Consequently in both cases,

cointegration is suspected, though this study did not investigate the evidence of

cointegration because even if it exists, evidence of long-run relationship between NIGH

and NIGINF, GHANH and GHANINF is provided. The study went ahead to establish

that the purchasing power of Ghanaian Cedi is superior to that of Nigerian Naira. From

the policy point of view, PPP can be used to assess the levels of exchange rates.

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