ABSTRACT
The paper explores the validity of PPP theory in South Africa. Cointegration theory is applied to monthly data on two nominal exchange rates of the rand and relative prices. Our tests identify that long-run co-movement exists between the nominal exchange rate and the relative prices between South Africa and the US and between South Africa and the UK. An estimated error-correction model shows that a proportion of the deviation from PPP in the initial period is corrected for rate in the following period, only in the rand-sterling exchange.