Testing The Real Interest Rate Parity Theory For Turkey: Evidence From The Fourier Unit Root Test
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https://doi.org/10.5281/zenodo.10056974Keywords:
Real Interest Rate Parity, Fourier Adf Unit Root Test, TurkeyAbstract
This study aims to examine the validity of real interest rate parity theory for the Turkish economy. In this context, traditional, structural break and Fourier typeunit root tests are applied for the monthly observations between 1986:4 and 2020:6. For the traditional unit root tests, Augmented Dickey–Fuller (ADF), Phillips-Perron (PP) and Dickey–Fuller GLS (DF-GLS) approaches are taken into account and the findings reveal that real interest rate series does not show stationarity properties for Turkey. For the unit root tests with structural breaks, Zivot-Andrews (1992) and Lee-Strazicich (2003, 2013) approaches are applied and the results also show that the real interest rate series does not stationary for Turkey. These two type results emphases that the real interest rate parity condition does not hold for Turkey. Finally, Fourier ADF unit root test were applied for the Fourier approach. The findings reveal that the real interest rate series is stationary and therefore the real interest parity theory is valid for Turkey. Accordingly, Fourier function unit root tests provide more evidence than traditional approaches.On the other hand, it has been determined that the interest rate parity theory is an effective approach in determining the long-term values of exchange rates for Turkey.
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