The Validity of Purchasing Power Parity Hypothesis in E-7 Countries: Panel Data Analysis

Özet

The exchange rates are one of the most important macroeconomic variablesinfluencing the economic activities of any country such as foreign trade, money andcapital markets. From this aspect, examining the changes in exchange rates, which areconsidered as one of the indicators of economic stability, is of significant importance.The aim of this study is to test the purchasing power parity (PPP) hypothesis for E-7countries between 1994 and 2017. Within the scope of this analysis, firstly thedependence between the cross-sections was examined. Then, the validity of PPPhypothesis was tested using SURADF (Seemingly Unrelated Augmented Dickey Fuller)panel unit root test developed by Breuer et al. (2001) and Carrion-i-Silvestre et al. (2005)panel unit root test (PANKPSS), which takes the structural breaks into consideration.According to the results of SURADF test, it was determined that the PPP is holds only inRussia and Turkey, but not in the other countries. According to the results of PANKPSSunit root test considering the structural breaks, however, it was found that PPP is holdsin all the countries.