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Does the Law of One Price Hold in a High-Inflation Environment?

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  • Sule Akkoyunlu
  • Boriss Siliverstovs

Abstract

This study addresses price convergence in two cities in Turkey (Istanbul and Ankara) using the annual data over the three quarters of the 20th century (1922-1998), characterized by prevailing high inflation rates for most of the period. In contrast to the rest of the literature addressing convergence in price levels with a typical result of extremely slow convergence rates at best, we argue that convergence is much easier detected in growth rates rather than levels of prices. We suggest using the bounds testing procedure of Pesaran et al. (2001) for this purpose. We find a clear-cut evidence on the existence of a common driving force behind inflation dynamics in Istanbul and Ankara-a finding that is intuitively appealing from the point of view of economic theory.

Suggested Citation

  • Sule Akkoyunlu & Boriss Siliverstovs, 2010. "Does the Law of One Price Hold in a High-Inflation Environment?," KOF Working papers 10-248, KOF Swiss Economic Institute, ETH Zurich.
  • Handle: RePEc:kof:wpskof:10-248
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    File URL: http://dx.doi.org/10.3929/ethz-a-005975777
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    References listed on IDEAS

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    6. Juselius, Katarina, 1995. "Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model," Journal of Econometrics, Elsevier, vol. 69(1), pages 211-240, September.
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    Keywords

    Price convergence; Bounds testing procedure; Turkey;

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