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Mean Reversion of Real Exchange Rates and Purchasing Power Parity in Turkey


  • Joseph D. ALBA
  • Donghyun PARK


The important concept of purchasing power parity (PPP) has a number of practical implications. Our central objective is to examine the stationarity of Turkey’s real exchange rates to test for the empirical validity of PPP. Our results from conventional univariate unit root tests fail to support PPP. However, when we use the empirical methodology developed by Caner and Hansen (2001), which allows us to jointly consider non-stationarity and non-linearity, we find evidence of non-linear mean reversion in Turkey’s real exchange rates. This implies that PPP holds in one threshold regime but not in another.

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  • Joseph D. ALBA & Donghyun PARK, 2004. "Mean Reversion of Real Exchange Rates and Purchasing Power Parity in Turkey," Econometric Society 2004 Far Eastern Meetings 530, Econometric Society.
  • Handle: RePEc:ecm:feam04:530

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    References listed on IDEAS

    1. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters,in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
    2. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    3. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-1042, November.
    4. Mehmet Caner & Bruce E. Hansen, 2001. "Threshold Autoregression with a Unit Root," Econometrica, Econometric Society, vol. 69(6), pages 1555-1596, November.
    5. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    6. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-1319, September.
    7. Sarantis, Nicholas, 1999. "Modeling non-linearities in real effective exchange rates," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 27-45, January.
    8. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-180.
    9. Lothian, James R. & Taylor, Mark P., 1997. "Real exchange rate behavior," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 945-954, December.
    10. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-470, October.
    11. James G. MacKinnon, 1990. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
    12. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, August.
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    More about this item


    Turkey; purchasing power parity; real exchange rate; unit root; non-linearity;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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