Validity of the Purchasing Power Parity Hypothesis for Türkiye: Evidence from Flexible Fourier Unit Root Tests
Abstract
The purchasing power parity (PPP) hypothesis suggests that the prices of similar goods in different countries will be the same. In other words, it is stated that prices will remain stable worldwide. In this context, this study is important in terms of price stability. The aim of this study is to determine whether the PPP hypothesis is valid or not in Türkiye. In this context, it is aimed to provide policymakers with a perspective in terms of the monetary policy to be implemented. The data range of the study covers the period between 1994:1 and 2025:8 and monthly observation values are used. The study differs from the studies in the literature in terms of the methods applied. As a method, flexible Fourier unit root tests that take into account soft structural breaks are applied. According to the findings of the study, the SGP hypothesis is found to be valid for the Turkish economy when soft structural breaks are taken into account. In other words, the effect of shocks to the real effective exchange rate series is transitory. Furthermore, according to the results obtained, inflation targeting policy has no effect on the real exchange rate. This result is important for policymakers.
Keywords
PPP Hypothesis, Real Effective Exchange Rate, Structural Breaks, Flexible Fourier Unit Root Tests
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