An econometric analysis for the validity of purchasing power parity

Purchasing power parity is the principle of selling similar goods at similar prices and is the rate of change that equalizes the purchase cost of different units by eliminating the price difference between SAGP countries. In this study, it is discussed that purchasing power parity, which compares the average costs of goods and services, determines the value of the real exchange rate and is subject to many studies in the literature. The main aim of this study is to investigate the real effective exchange rate series based on CPI and the validity of the SAGP hypothesis covering the period from 1994 January to May 2020 in which Turkey's economy is experiencing a significant financial crisis.The validity of SAGP is analysed with various unit root tests. According to the test results applied, SAGP hypothesis is invalid in ADF and PP unit root test. Since the KPSS test results vary according to the model form, it does not provide clear information about the degree of integration of the series. In the Zivot-Andrews unit root test, the result of the series is non-stationary with structural breakage for the three models. According to the results of the LM test, it was concluded that REDK was weakly stationary with structural break. According to the results of the KSS test, in can be said that REDK is not stationary and shows coincidence features. According to the results of the M-KSS test, it states that the SAGP hypothesis is invalid. During Monetary policy instruments implemented in our country during the times of the economic crisis seem to be insufficient and therefore SAGP validity cannot be provided for the sampling period under consideration. Keywords: Purchasing Power Parity, Real Effective Exchange Rate, Unit Root