Re-examination of the long-run purchasing power parity: further evidence from Turkey

Abstract

In this article, we re-examine the empirical validity of the Purchasing Power Parity (PPP) theory for the Turkish economy. For this purpose, an empirical model is constructed using some contemporaneous estimation techniques such as multivariate co-integration and vector error correction methodology. Our estimation results reveal that the PPP can strongly be supported as a long-run stationary steady-state relationship for the Turkish economy.

Notes

¹ Likewise, Rogoff (1996) touchs upon briefly the possible data problems taken place by the differences in the basket weights considered to construct the price indices on which the PPP relationship is based.

² Rather than imposing a linear specification of the PPP hypothesis, some contemporaneous recent literature dealing with mean reversion of real exchange rates also emphasize that the time-series behaviour of the real exchange rates can be better approximated by a nonlinear adjustment process employing smooth transition autoregressive models. For a brief account of such a methodology, see, e.g. Kilian and Taylor (2003) and Taylor (2006).

³ Taylor (1988) and Kim (1990) testing the long-run PPP relationship for some major currencies against the US dollar (1990) can be considered among the pioneering studies that use co-integrating and VRC techniques to reveal both the long-run stationary relationships leading to the PPP hypothesis and the deviations from the PPP relationship, that affect exchange rates. Furthermore, Sarno and Taylor (1998) and Taylor and Sarno (1998) in this sense are deserved to be examined in the contemporaneous economics literature.