Testing the long-run PPP for Turkey: new evidence from the Fourier quantile unit root test

ABSTRACT

This study analyses the long-run validity of the purchasing power parity (PPP) between Turkey and its major trading partners (China, Euro Area, Russia, United Kingdom, and United States) by using the Fourier quantile unit root test. Fourier quantile unit root test results show that PPP is valid for all countries. Additionally, the Fourier quantile unit root test presents more evidence in favour of the PPP hypothesis in comparison to conventional and other Fourier-type unit root tests.

KEYWORDS:

• Purchasing power parity
• quantile unit root test
• Fourier function
• Turkey

JEL CLASSIFICATIONS:

• F41
• C22
• C50

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For the detailed theoretical and empirical literature on PPP, see Sarno and Taylor (2002) and Taylor and Taylor (2004).

² The cases of the other countries are as follows: (a) Current account deficit (% of GDP): Brazil −2.72%, Indonesia −1.70%, India −2.35%, and South Africa −3.68%. (b) Inflation rate: Brazil 6.35%, Indonesia 5.16%, India 7.61%, and South Africa 5.64%. (c) Depreciation of the national currency: Brazilian real 196%, Indonesian rupiah 151%, Indian rupee 143%, and South African rand 186%.

³ The EU covers 19 countries that use the Euro.

⁴ PPP can be tested in strong and weak forms (Dornbusch 1985). The strong form is simply defined as in Equation (1). Accordingly, absence of unit root in RER series mean that effect of the shocks will be short-lived and PPP is valid in the long run. On the other hand, the weak form is tested by using cointegration methods which examines the long-run relationship between nominal exchange rates and price levels. This study disregards the weak form.