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.