Modeling purchasing power parity using co-integration: evidence from Turkey

In this study, we consruct a co-integration model of the Turkish economy using high frequency data to examine the validity of the purchasing power parity (PPP) theory. The ex-post estimation results derived from the analysis of monthly observations for the January 1987 – December 2004 period generally support the use of the PPP theory in predicting the movement of currency values in the Turkish economy.The methodology developed in this study can be used in other countries to ensure the success of economic policies that depend on the existence of PPP relationship.