Multivariate Cointegration Analysis of the PPP and UIP relations between South Africa and the United States: Empirical Evidence

This research assesses whether purchasing power parity (PPP) and uncovered interest parity (UIP) are valid stationary relationships in the long run for South Africa. Quarterly data from January 1972 to June 2006 for South Africa (SA) and the United States (US) is used. The empirical model is a six-dimensional vector autoregressive (VAR) model incorporating oil prices as an exogenous 1(1) variable. The inclusion of this variable has the advantage of improving estimation efficiency and allows us to investigate the impact of oil price shocks in the variables of interest through impulse responses. The model is further conditioned on the changes in average world gold prices in order to account for fluctuations in South Africa's exchange rate. In addition, the paper also represents an innovative contribution to inflation forecast processes in South Africa by employing probability event forecasts based on stochastic simulation, which account for future uncertainty.