TESTING THE RURCHASING POWER PARITY HYPOTHESIS: EVIDENCE FROM NON-LINEAR UNIT ROOT TESTS
Testing the purchasing power parity hypothesis: evidence from non-linear unit root tests
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https://doi.org/10.5281/zenodo.7404907Keywords:
Nonlinearity, Unit Root Tests, Purchasing Power Parity, Real Effective Exchange Rate, FourierAbstract
The departure of the real exchange rate from the equilibrium level is accepted as a problem in the economy. Therefore, many hypotheses have been developed in the literature to test the reliability of the real exchange rate. In this context, the Purchasing Power Parity hypothesis is accepted as the most valid method in determining the exchange rate. Purchasing Power Parity provides reliable findings by eliminating price differences. Purchasing power parity is expressed as the rate of change that equalizes the purchasing power of different units by eliminating the price difference between countries. This study aims to examine the validity of purchasing power parity for Turkey. In this context, traditional and Fourier nonlinear unit root tests were used in the analysis of the data for the period 1994-2022. The research revealed that the purchasing power parity theory is valid for Turkey. As a result, Turkey's real exchange rates remained stable throughout the study period and real exchange rate shocks were short lived. In other words, it is estimated that purchasing power parity will actively influence Turkey's monetary policy decisions.
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