The Purchasing Power Parity Hypothesis for a High Inflation Country: A Re-Examination of the Case of Turkey
Posted: 6 Sep 2010
Date Written: September 5, 2010
The long-run purchasing power parity (PPP) hypothesis is re-examined for Turkey and strong evidence on long-run PPP is provided by using standard multivariate cointegration techniques. It is argued that the refutation of PPP by Telatar and Kazdagli does not necessarily imply the failure of taking the nonlinearity in real exchange rate adjustment into account, as proposed by Sarno, but it may be due to the use of univariate framework for testing PPP chosen by Telatar and Kazdaglı. By using persistence profiles, half-life deviations from PPP are estimated as low as one and a half years. Since these estimates are substantially lower than those previously obtained in the literature, the analysis suggests that high inflation environment does not constitute a case for the PPP puzzle.
Keywords: Purchasing Power Parity, Turkey, PPP puzzle
JEL Classification: F41, C32
Suggested Citation: Suggested Citation