Abstract:

Purchasing Power Parity (PPP), which is an exchange ratio, eliminates price differences between countries, equates the purchasing power of the currencies of these countries, and emerges as an important criterion in the international development comparisons. PPP theory is based on the assumption that the long-term real exchange rate constant. Aim of this study is to analyze the PPP theory for the countries that defined as G7 between 1995-2012 periods. In this context, stability of the real exchange rate series have been tested with the first-generation and second-generation unit root tests in the scope of the panel data analysis. As a result of the analysis, there is evidence that unit root in the real exchange rate is not obtained with the first-generation panel unit root test, with the second-generation unit root tests it is obtained that the series contain a unit root, in other words, the PPP theory is not valid for the G7 countries.

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