The behavior of Turkish exchange rates: A panel data perspective

Abstract

This paper investigates the behavior of Turkish exchange rates within the context of purchasing power parity (PPP) hypothesis by means of recent developments in the panel unit root testing procedures for ten Turkish real exchange rates during January 2002-May 2012. The unit root test which accounts for nonlinearity, smooth structural shifts, and cross-section dependency supports that PPP hypothesis holds for Eurozone and European countries (Denmark, Norway, Sweden, Switzerland, and United Kingdom), while it does not hold for non-European trading partners (Canada, Japan, Saudi Arabia, and USA). From the empirical results, we can conclude that PPP hypothesis holds in the countries which have the free trade agreement, while it is violated in the countries in which there are trade barriers and greater distance. The findings therefore provide policy implications for Turkey in determining equilibrium exchange rates with her major trading partners. © 2014 Elsevier B.V.