PURCHASING POWER PARITY APPROACH TO REAL EXCHANGE RATE MISALIGNMENT DETERMINATION IN TURKEY: AN ANALYSIS WITH UNIT ROOT TEST WITH STRUCTURAL BREAK AND NONLINEAR UNIT ROOT

Abstract

The real exchange rate is an important indicator that permeates large areas of the economy. Therefore, the level of the real exchange rate is perceived as a signal for policy makers. Temporary deviation of the real exchange rate from its equilibrium level is natural but permanent deviations are a serious problem for the economy and it is known as “real exchange rate misalignment”. There are several alternative models to determine the real exchange rate misalignment but “purchasing power parity” is the first and the most popular theory to determine the real exchange rate misalignment and it is seen as a starting point for measuring misalignment. In this study real exchange rate misalignment in turkey is analyzed with first generation unit root tests, unit root tests with structural break and nonlinear unit root test, in the frame of purchasing power parity theory. The evidence from first generation unit root tests, unit root tests with structural break and nonlinear unit root tests show that the real exchange rate is misaligned in Turkey.