Empirical investigation of purchasing power parity for Turkey: Evidence from recent nonlinear unit root tests

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Yıldırım D.

Central Bank Review, vol.17, pp.39-45, 2017 (Scopus) identifier

  • Publication Type: Article / Article
  • Volume: 17
  • Publication Date: 2017
  • Doi Number: 10.1016/j.cbrev.2017.03.001
  • Journal Name: Central Bank Review
  • Journal Indexes: Scopus, TR DİZİN (ULAKBİM)
  • Page Numbers: pp.39-45
  • Keywords: Purchasing power parity, Real exchange rate, Nonlinearity, Smooth transition, Turkey, REAL EXCHANGE-RATE, OIL-PRICE SHOCK, MEAN REVERSION, GREAT CRASH, HYPOTHESIS, BEHAVIOR, PPP, STATIONARITY, VALIDITY, BREAKS
  • Middle East Technical University Affiliated: Yes

Abstract

This study explores the empirical validity of the purchasing power parity (PPP) hypothesis between Turkey and its four major trading partners, the European Union, Russia, China and the US. Accounting for the nonlinear nature of real exchange rates, we employ a battery of recently developed nonlinear unit root tests. Our empirical results reveal that nonlinear unit root tests deliver stronger evidence in favor of the PPP hypothesis when compared to the conventional unit root tests only if nonlinearities in real exchange rates are correctly specified. Furthermore, it emerges from our findings that the real exchange rates of the countries having a free trade agreement are more likely to behave as linear stationary processes.