Does the Law of One Price Hold in a High-Inflation Environment? A Tale of Two Cities in Turkey

KOF Swiss Economic Institute Working Paper No. 248

16 Pages Posted: 25 Jan 2010

See all articles by Sule Akkoyunlu

Sule Akkoyunlu

ETH Zürich - KOF Swiss Economic Institute; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Boriss Siliverstovs

German Institute for Economic Research (DIW Berlin) - Department of International Economics

Date Written: January 2010

Abstract

This study addresses price convergence in two cities in Turkey (Istanbul and Ankara) using the annual data over the three quarters of the 20th century (1922–1998), characterized by prevailing high inflation rates for most of the period. In contrast to the rest of the literature addressing convergence in price levels with a typical result of extremely slow convergence rates at best, we argue that convergence is much easier detected in growth rates rather than levels of prices. We suggest using the bounds testing procedure of Pesaran et al. (2001) for this purpose. We find a clear-cut evidence on the existence of a common driving force behind inflation dynamics in Istanbul and Ankara - finding that is intuitively appealing from the point of view of economic theory.

Keywords: Price convergence, Bounds testing procedure, Turkey

JEL Classification: C22, C32, C52, E31

Suggested Citation

Akkoyunlu, Sule and Siliverstovs, Boriss, Does the Law of One Price Hold in a High-Inflation Environment? A Tale of Two Cities in Turkey (January 2010). KOF Swiss Economic Institute Working Paper No. 248, Available at SSRN: https://ssrn.com/abstract=1541933 or http://dx.doi.org/10.2139/ssrn.1541933

Sule Akkoyunlu (Contact Author)

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Boriss Siliverstovs

German Institute for Economic Research (DIW Berlin) - Department of International Economics ( email )

Mohrenstraße 58
Berlin, 10117
Germany

HOME PAGE: http://www.diw.de/programme/jsp/MA.jsp?language=en&uid=bsiliverstovs

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