Testing the Validity of Purchasing Power Parity at the Sectoral Level: The Case of Türkiye

Because the purchasing power parity (PPP) hypothesis is a key element of equilibrium exchange rate models, many scholars have examined its validity. While factors such as the tradability of goods and varying tax rates on products are expected to influence the validity of the PPP, few studies have examined it at the sectoral level. In this research, the validity of the PPP hypothesis is tested sector-by-sector by analysing real effective exchange rates for 23 manufacturing sectors in Türkiye. Using standard unit root tests, the validity of PPP is confirmed in 11 of the 23 sectors. Evidence supporting the stationarity of the exchange rate increases when nonlinearity is taken into account; the PPP hypothesis is supported for all sectors except tobacco products and clothing.