An empirical investigation of purchasing power parity (PPP) for Turkey

Whether purchasing power parity (PPP) holds for the German mark (euro)-Turkish lira real exchange rate has significant implications on Turkey's prospects for joining the European Union (EU). As such, it is important to accurately test the empirical validity of PPP between the two currencies. To do so, we apply the methodology developed by Caner and Hansen [Caner, M., & Hansen, B. (2001). Threshold autoregression with a unit root. Econometrica, 69(6), 1555-1596], which allows us to simultaneously consider non-stationarity and non-linearity. Our findings indicate that PPP holds for the lira-mark exchange rate in one threshold regime but not in another. They also provide stronger support for PPP in the most recent years.