Purchasing power parity with multiple structural breaks: evidence from Turkey

This paper aims to test the validity of the purchasing power parity hypothesis by analyzing the stochastic behavior of Turkey's real exchange rate for the period 1990-2006. For this purpose, the minimum LM unit root test with two structural breaks is applied to real exchange rate data, which consists of monthly series of CPI-based real exchange rate index. The test results indicate that real exchange rate is trend-stationary. Following Papell and Prodan (2006), the trend-stationary real exchange rate can be interpreted as evidence that supports the validity of the Trend Qualified PPP (TQPPP) for Turkey. This result also suggests that shocks do not have any permanent effect on the real exchange rate in Turkey.