Investigation of the Validity of Purchasing Power Parity Hypothesis with Fourier Unit Root Tests: The Case of Turkey
Purchasing power parity is one of the most frequently discussed economic theories in the literature. Furthermore, the validity of purchasing power parity is important in terms of being a common exchange rate used in international comparison. In this study, the validity of purchasing power parity was examined using Fourier unit root tests for Turkey for the period 1992:01-2018:12. In order to make a comparison, two different recently developed unit root tests were used in the study. The results show that the purchasing power parity hypothesis is valid for Turkey. Accordingly, the real exchange rate is stationary and the shocks on the real exchange rate is temporary in this period. According to overall results, it is expected that PPP play an active role in monetary policy decisions.
Satın Alma Gücü Paritesi Hipotezi Geçerliliğinin Fourier Birim Kök Testleri ile İncelenmesi: Türkiye Örneği
Satın alma gücü paritesi, literatürde en sık tartışılan ekonomik teorilerden biridir. Diğer taraftan, satın alma gücü paritesinin geçerliliği, uluslararası karşılaştırmada kullanılan ortak bir döviz kuru olması açısından önemlidir. Bu çalışmada Türkiye için satın alma gücü paritesinin geçerliliği 1992:01-2018:12 dönemi aylık verileri kullanılarak Fourier birim kök testleri yardımıyla incelenmiştir. Çalışmada karşılaştırma yapılabilmesi amacıyla literatüre son zamanlarda kazandırılan iki farklı birim kök testi kullanılmıştır. Çalışmanın sonuçları Türkiye için satın alma gücü paritesi hipotezinin geçerli olduğunu göstermektedir. Buna göre Türkiye’nin incelenen dönemde reel döviz kurları durağandır ve reel döviz kurlarına gelen şoklar geçicidir. Çalışmadan elde edilen genel sonuca göre Türkiye için SAGP’nin para politikası kararlarında etkin rol oynaması beklenmektedir.
Purchasing power parity (PPP), which is one of the subjects of interest in international finance and economy, is defined as a rate of change that equalizes the purchasing power of different currencies by eliminating price level differences between countries (TURKSTAT, 2008). In other words, the theory of purchasing power parity states that the nominal exchange rate between the two currencies is determined by the purchasing power of each country’s currency. This means that the exchange rate between the two countries must be equal to a fixed level of goods and services basket price of the two currencies. While economists generally doubt the validity of PPP in the short term, they agree that it is necessary to investigate whether PPP is valid in the long term because price differences between countries are not sustainable in the long term (Acaravcı and Öztürk, 2010). Chortareas and Kapetanios (2009) evaluated the importance of purchasing power parity in terms of both traditional and new approaches to open economy macroeconomics for policy purposes. According to the traditional approach, the validity of PPP is valuable information for policy-makers who want to evaluate the effects of devaluation since the effects of devaluation under PPP on competitiveness will be eliminated in the long term. In open economies with new approaches, PPP is a necessary condition for equalizing market integrity and marginal utility. Empirical studies use cointegration tests, variance ratio tests, and quantitative regressions for nominal exchange rates and prices, and unit root tests for real exchange rates, to assess the validity of PPP. (Chortareas and Kapetanios, 2009; 391). The estimation of PPP exchange rates is very important for practical purposes. These objectives are; (i) determining the degree of deviation from the nominal exchange rate, ie determining whether the exchange rate is low or not. (ii) making appropriate policy decisions; (iii) adjusting currency parities; (iv) an international comparison of national income levels; and (v) a comparison between domestic price and foreign price (Sarno and Taylor, 2002). Whether PPP is valid or not should be examined. Where PPP is not valid, PPP cannot be used as a criterion for international income level comparison and estimation of real exchange rates, and where applicable, it can be used as a criterion for the level of development comparisons and the reliability of all economic decisions (Güriş et al. 2016). . In this study, the validity of purchasing power parity was examined using Fourier unit root tests for Turkey for the period 1992:01-2018:12. In order to make a comparison, two different recently developed unit root tests were used in the study. The study is expected to contribute to the current literature in terms of the method used. The studies for Turkey is as follows; Gurbuz and Hasgur (1997), Telatar and Kazdagli (1998), Erlat (2003), Yazgan (2003), Alba and Park (2005), Aslan and Kanbur (2007), Ozdemir (2008), Kalyoncu (2009), Lightning and Lightning (2012), Sener et al. (2015), Güriş et al. (2016), Rock and Steel (2018). In cases where series do not have a linear structure, nonlinear unit root tests give more powerful results than linear unit root tests. In the literature, there are unit root tests examining stationarity structures of nonlinear series. In this study, Güris (2018) and Ranjbar et al. (2018) non-linear Fourier unit root tests were used. Firstly, the linearity of the calculated real exchange rate series was examined and it was found that it does not have a linear structure. In the second part of the empirical analysis, the stationarity of the series was examined with the help of Fourier unit root tests. The obtained results indicate that Turkey has a stationary structure in the real exchange rate series. Accordingly, it is seen that the PPP hypothesis is valid for Turkey. In other words, the analyzed period, the real exchange rate being stationary and Turkey coming to the real exchange rate shocks are temporary. The validity of PPP means that the prices of goods expressed in the same currency are the same anywhere in the world. Therefore, PPP is expected to play an active role in the monetary policy decision for Turkey.