Abstract:

This paper scrutinized the validity of the Purchasing Power Parity (PPP) hypothesis for the Turkish Lira along with the Euro (19), the Dollar, the Ruble and GBP for the period between 2002 and 2018. In the related literature, the conventional unit root test procedures are often used in examining the validity of the PPP hypothesis. However, the conventional unit root procedures require normally distributed residuals. But the real exchange rate series rarely satisfy this condition. Hence, this paper investigates the validity of the purchasing power parity (PPP) relying on the RALS-LM unit root procedure, which stretches the assumption of normality. The RALS-LM (one and two trend shift) test findings revealed that PPP hypothesis holds just for the dollar and the GBP. This paper has two vital results in terms of the current PPP literature. Firstly, conventional unit root test procedures are not appropriate for testing the real exchange rate series and secondly, even though appropriate unit root testing procedures were used the results are still very sensitive to the chosen data range.

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