An Analysis of Purchasing Power Parity for the Turkish Economy Using Unit Root Testing with Multiple Structural Breaks

Abstract

The application of the law of one price to the international market is purchasing power parity. Purchasing power parity associates the prices of all goods used in foreign trade with the exchange rate. If the purchasing power parity is valid, the changes in the nominal exchange rates balance the changes at the price levels among countries. Thus, the real exchange rate fluctuates about a fixed average. For this, the testing of the purchasing power parity can be done through studying the unit root properties of the real exchange rate. In this study, the real exchange rate for Turkey has been examined using unit root tests with standard and multiple breaks. It has been determined that purchasing power parity is not valid in the Turkish economy.