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Testing international parity hypothesis in a multivariate identified co-integrating system: the Turkish evidence

  • Levent, Korap

In this paper, a multivariate co-integrating model is constructed upon the Turkish economy to examine the validity of the purchasing power parity and the uncovered interest parity theories simultaneously. Estimation results obtained from the identified co-integrating vectors support a priori modelling expectations and yield evidence to the existence of both parities when integrated within each other. However, no evidence is obtained in favor of the two international exchange rate determination parity hypotheses when formulated in isolation. A policy inference derived from the paper can be summarized such that, since the market mechanisms seem to closely affect the long-run course of the nominal exchange rate, exchange rate based stabilization programs should be appreciated by economic agents in a cautious way.

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File URL: https://mpra.ub.uni-muenchen.de/20020/1/MPRA_paper_20020.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20020.

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Date of creation: 2008
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Publication status: Published in İstanbul Üniversitesi Sosyal Bilimler Meslek Yüksek Okulu Sosyal Bilimler Dergisi 1.2008(2008): pp. 129-137
Handle: RePEc:pra:mprapa:20020
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  1. Caporale, Guglielmo Maria & Kalyvitis, Sarantis & Pittis, Nikitas, 2001. "Testing for PPP and UIP in an FIML framework: Some evidence for Germany and Japan," Journal of Policy Modeling, Elsevier, vol. 23(6), pages 637-650, August.
  2. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-62, April.
  3. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  4. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  5. Anindya Banerjee & Robin L. Lumsdaine & James H. Stock, 1990. "Recursive and Sequential Tests of the Unit Root and Trend Break Hypothesis: Theory and International Evidence," NBER Working Papers 3510, National Bureau of Economic Research, Inc.
  6. MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank, Research Centre.
  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  8. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
  9. 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.
  10. Johansen, Soren, 1992. "Determination of Cointegration Rank in the Presence of a Linear Trend," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 383-97, August.
  11. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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