Testing the Purchasing Power Parity (PPP) in West and Central Africa

IMF Working Papers, June 13, 2025

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The numeraire currency matters for evidence in favor of PPP.
Results show slightly stronger evidence when the euro is used as the reference compared to other numeraire currencies, although results vary across different methods.
Evidence for PPP is stronger across the currency zones after the 1994 devaluation of the CFA franc.
After the 1994 devaluation, evidence for PPP using the renminbi as reference is also stronger, suggesting an increasing importance of the renminbi for the economies in West and Central Africa.
Significant differences in price dynamics are documented for the CEMAC and the WAEMU, the two components of the CFA zone, with stronger evidence for PPP found for the WAEMU.
Reversal speed to PPP is faster than the 2-3 years found in the literature.
Real exchange rates of the currency zones revert to PPP mainly through adjustments of foreign prices expressed in domestic currencies—which may result from changes in nominal exchange rates of the reference currencies or foreign prices—and less so via adjustments in domestic prices.

Countries considered: those within the WAEMU, CEMAC, CFA, and ECOWAS currency zones.
Four possible numeraire currencies analyzed: U.S. dollar, euro, renminbi, and the CFA franc.
Empirical techniques used:
- Panel unit-root tests
- Single-country unit-root tests
- Cointegration techniques
- Error-correction techniques

Choice of numeraire/reference currency affects empirical assessments of PPP for West and Central African economies; policy analysis and exchange-rate assessments should account for numeraire selection.
The increasing role of the renminbi post-1994 devaluation implies growing external price and exchange-rate linkages with renminbi-denominated markets.
Faster reversion to PPP and differing dynamics between CEMAC and WAEMU suggest tailored exchange-rate and inflation-monitoring policies across the CFA zone components.
Since adjustment to PPP occurs mainly via foreign prices expressed in domestic currencies, monitoring of external nominal exchange-rate movements and foreign inflation is important for domestic price stability strategies.