Do PPP and UIP Need Each Other in a Financially Open Economy? The Turkish Evidence
AbstractThis paper investigates the empirical validity of the capital enhanced equilibrium exchange rates (CHEERs) model for the Turkish data. The results of the Johansen cointegration analyses for the variable system containing Turkish and US inflation rates, interest rates, and exchange rate suggest the existence of two stationary relationships explaining the long run evolution of Turkish interest rates and inflation rates, respectively. The results of the structural model obtained by data-acceptable over-identifying restrictions over the cointegration space suggest the non-rejection of the hypothesis that the first vector contains uncovered interest parity (UIP) and the second vector contains purchasing power parity (PPP) with proportionality and symmetry conditions. Consistent with the CHEERs approach, each of the international parity hypotheses is strongly rejected when formulated independently. This is a theory-consistent result for a financially open economy for which equilibrium conditions of asset and commodity markets may not be independent of each other.
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Bibliographic InfoPaper provided by ERC - Economic Research Center, Middle East Technical University in its series ERC Working Papers with number 0101.
Length: 21 pages
Date of creation: Jan 2001
Date of revision: Jan 2001
PPP; UIP; Exchange rates; cointegration; Turkey;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-MON-2004-12-21 (Monetary Economics)
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