Real Exchange Rates Persistence in the West African Monetary Zone: A Revisit of the PPP Puzzle

The purchasing power parity (PPP) is important in the development of key theories in economics. The balance of payment and the portfolio-balance theories, for example, are developed on the notion that PPP exists. Also, key exchange rate and trade policies are formulated on the basis that PPP holds. As The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone propose to form a monetary union—the West African Monetary Zone (WAMZ), the validity of PPP is crucial to prevent member countries from gaining arbitrages by trading with one another. This paper examines whether the PPP holds for these countries using a mixture of time series techniques over varying sample periods. Consistent with some existing studies, we find the PPP not to hold for these countries, implying that the WAMZ agenda may face some challenges, since member countries can potentially gain from trade and investment arbitrages by trading with one another