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Do real exchange rates contain a unit root? Evidence from Turkish data

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  • Tastan Huseyin

Abstract

This study explores whether the long-run purchasing power parity (PPP) hypothesis holds for selected real exchange rates from Turkish economy during the period 1982M1-2003M12. In addition to conventional unit root tests, five different unit root test procedures have been applied including efficient point-optimal tests, extended M tests and GLS-detrended variants of DF tests, to four monthly real exchange rate series defined in terms of both producer and consumer price indices. The countries analysed are the USA, the UK, Germany and Italy which are major trade partners of Turkey. Mixed evidence is found for the long-run PPP hypothesis when real exchange rate is defined in terms of German DM and Italian Lira. However, the empirical analysis reveals that the PPP hypothesis holds strongly in the long-run for the UK£ and US$ based real exchange rates series using either PPI or CPI. In corroboration with other studies in the literature, the bias correlated half-life estimates suggest relatively faster speeds of adjustment supporting the view that the deviations from the PPP rate dissipate rather quickly for relatively high inflation countries.

Suggested Citation

  • Tastan Huseyin, 2005. "Do real exchange rates contain a unit root? Evidence from Turkish data," Applied Economics, Taylor & Francis Journals, vol. 37(17), pages 2037-2053.
  • Handle: RePEc:taf:applec:v:37:y:2005:i:17:p:2037-2053
    DOI: 10.1080/00036840500244584
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    References listed on IDEAS

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    Cited by:

    1. Kumar Narayan, Paresh & Narayan, Seema & Popp, Stephan, 2010. "Energy consumption at the state level: The unit root null hypothesis from Australia," Applied Energy, Elsevier, vol. 87(6), pages 1953-1962, June.
    2. Hakan Kum, 2012. "The Impact of Structural Break(s) on the Validity of Purchasing Power Parity in Turkey: Evidence from Zivot-Andrews and Lagrange Multiplier Unit Root Tests," International Journal of Economics and Financial Issues, Econjournals, vol. 2(3), pages 241-245.
    3. Lean Hooi Hooi & Russell Smyth, 2007. "Are Asian real exchange rates mean reverting? Evidence from univariate and panel LM unit root tests with one and two structural breaks," Applied Economics, Taylor & Francis Journals, vol. 39(16), pages 2109-2120.
    4. Maxym Chaban, 2010. "Cointegration analysis with structural breaks and deterministic trends: an application to the Canadian dollar," Applied Economics, Taylor & Francis Journals, vol. 42(23), pages 3023-3037.

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