A FI-STAR Approach to the Purchasing Power Parity in the North African Countries

Abdelhak BENAMAR, Kamel AIT ZIANE, Houria AMIMI, Mohamed BENBOUZIANE

Abstract


The main objective of this paper is to test the validity of the purchasing power parity in the North African countries. Earlier studies have used either nonlinear models or Long Memory (ARFIMA) process to look for the unit-root properties of the exchange rate behaviour. While the use of each technique independently can in some cases be favourable for the PPP hypothesis, it has failed in others. This is why recently the joint hypothesis of long memory and stochastic regime switching models has been developed. In fact, empirical evidence has shown that the two modelling techniques can be intimately linked. In this paper we will be using the FISTAR model proposed by van Dijk, Franses and Paap (2002) is order to test the validity of PPP. Several major findings have been raised from our study. The results show that the joint hypothesis of long memory and nonlinearity is not accepted in all our North African exchange rates. In fact, the behaviour is shown to be nonlinear. The results also show that the purchasing power parity could not be accepted in the case of Tunisia. We found that there is no evidence of long memory in the cases of Algeria and Egypt. Moreover, the study has shown that when using ESTAR model alone, this can lead to some misinterpretation of the real exchange rate behaviour in many cases. This is why it is necessary to use the FI-STAR model which would give more information to policy makers to face exchange rate shocks, especially, when these shocks are characterised by a long memory process.


Full Text: PDF DOI: 10.5539/ibr.v2n3p136

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International Business Research  ISSN 1913-9004 (Print), ISSN 1913-9012 (Online)

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