Purchasing Power Parity: Some empirical evidence on Lesotho

This paper investigates the validity of purchasing power parity (PPP) hypothesis under fixedexchange rate regime. First, the time series characteristics of real exchange rate areinvestigated using ADF unit root tests. The real exchange rate is found to be a random walk, arevelation that does not lend support to the validity of the PPP doctrine. Finally,cointegration-error-correction technique (a relatively more reliable procedure) is used toexamine the issue of PPP. A major advantage of this procedure is that the coefficients (βi’s)are estimated in an unconstrained fashion and the tests for validity or otherwise of therestrictions come last. Using this methodology, we are able to find evidence in favour of thePPP hypothesis