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JOURNAL OF APPLIED BUSINESS AND ECONOMICS
Inflation and the Purchasing Power Parity in South Africa
Author(s): Glenville Rawlins
Citation: Glenville Rawlins, (2013) "Inflation and the Purchasing Power Parity in South Africa," Journal of Applied Business and Economics, Vol. 15, Iss. 3, pp. 11-18
Article Type: Research paper
Publisher: North American Business Press
Abstract:
This paper seeks to ascertain whether current inflation differentials can explain the differences between
contemporaneous and previous exchange rate levels for South Africa and each of five of her trading
partners in the developed world: the US, the UK, France, Germany and Japan. With the help of the
absolute version of the Power Parity Theory (PPP) theory, the nominal exchange rate and national price
levels are treated as integrated processes that will allow for trade between a pair of countries to make the
exchange rate a stationary variable. After performing Ordinary Least Squares Regression tests, unit root
tests are conducted on the various price and exchange rate variables. Next, using the Johansen
Cointegration method, the paper investigates whether there is an underlying long-term relationship
between the price differentials and the exchange rate for South Africa and each of these five developed
countries (DCs). These various tests yield results that are generally mixed to somewhat unfavorable to
the PPP Theory.
