Do PPP and UIP Need Each Other in a Financially Open Economy? The Turkish Evidence
This 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.
|Date of creation:||Jan 2001|
|Date of revision:||Jan 2001|
|Contact details of provider:|| Postal: Ankara 06531|
Phone: +90 (312) 210 2003
Fax: (312) 210 1244
Web page: http://www.erc.metu.edu.tr
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Flood, Robert P & Rose, Andrew K, 1998.
"Understanding Exchange Rate Volatility Without the Contrivance of Macroeconomics,"
CEPR Discussion Papers
1944, C.E.P.R. Discussion Papers.
- Flood, Robert P & Rose, Andrew K, 1999. "Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics," Economic Journal, Royal Economic Society, vol. 109(459), pages F660-72, November.
- Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
- Dickey, David A & Rossana, Robert J, 1994. "Cointegrated Time Series: A Guide to Estimation and Hypothesis Testing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(3), pages 325-53, August.
- Hali J. Edison & William R. Melick, 1995.
"Alternative approaches to real exchange rates and real interest rates: three up and three down,"
International Finance Discussion Papers
518, Board of Governors of the Federal Reserve System (U.S.).
- Edison, Hali J & Melick, William R, 1999. "Alternative Approaches to Real Exchange Rates and Real Interest Rates: Three Up and Three Down," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(2), pages 93-111, April.
- MacDonald, Ronald, 1999. "Exchange Rate Behaviour: Are Fundamentals Important?," Economic Journal, Royal Economic Society, vol. 109(459), pages F673-91, November.
- Kenneth A. Froot & Kenneth Rogoff, 1994.
"Perspectives on PPP and Long-Run Real Exchange Rates,"
NBER Working Papers
4952, National Bureau of Economic Research, Inc.
- Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
- Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
- Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004, October.
- Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, May.
- Juselius, Katarina & MacDonald, Ronald, 2004. "International parity relationships between the USA and Japan," Japan and the World Economy, Elsevier, vol. 16(1), pages 17-34, January.
- Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477, October.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:met:wpaper:0101. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Erol Taymaz)
If references are entirely missing, you can add them using this form.