The Nature of Shocks to Turkish exchange rates: what panel approach says?

This paper investigates the behavior of Turkish exchange rates within the context of purchasing power parity (PPP) hypothesis, -employing ten Turkish real exchange rates during January 2002-May 2012-, by means of recent developments in panel unit root testing procedures. When we account for nonlinearity, smooth structural shifts, and cross-section dependency, the empirical analysis supports that PPP hypothesis is valid 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 is hold 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 important policy implications for Turkey about determining equilibrium exchange rates with Eurozone and other European Union countries.