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Mean Reversion of Real Exchange Rates and Purchasing Power Parity in Turkey

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  • Joseph D. ALBA
  • Donghyun PARK

Abstract

The important concept of purchasing power parity (PPP) has a number of practical implications. Our central objective is to examine the stationarity of Turkey’s real exchange rates to test for the empirical validity of PPP. Our results from conventional univariate unit root tests fail to support PPP. However, when we use the empirical methodology developed by Caner and Hansen (2001), which allows us to jointly consider non-stationarity and non-linearity, we find evidence of non-linear mean reversion in Turkey’s real exchange rates. This implies that PPP holds in one threshold regime but not in another.

Suggested Citation

  • Joseph D. ALBA & Donghyun PARK, 2004. "Mean Reversion of Real Exchange Rates and Purchasing Power Parity in Turkey," Econometric Society 2004 Far Eastern Meetings 530, Econometric Society.
    • Handle: RePEc:ecm:feam04:530
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    References listed on IDEAS

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    1. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
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    3. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-1042, November.
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    More about this item

    Keywords

    Turkey; purchasing power parity; real exchange rate; unit root; non-linearity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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