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Does the law of one price hold in a high-inflation environment? A tale of two cities in Turkey

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Abstract:

This study addresses the price convergence in two cities in Turkey (Istanbul and Ankara) using annual data over the three-quarters of the twentieth century (1922–1998), characterized by prevailing high inflation rates for most of the period. In contrast to the rest of the literature addressing convergence in price levels with a typical result of extremely slow convergence rates at best, we argue that convergence is much easier detected in growth rates rather than levels of prices. We suggest using the bounds testing procedure of Pesaran et al. (2001) for this purpose. We find a clear-cut evidence on the existence of a common driving force behind inflation dynamics in Istanbul and Ankara – a finding that is in contrast with the results typically reported in related literature.

Keywords: C22; C32; C52; E31; bounds testing procedure; price convergence; structural breaks

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2014.925190

Affiliations: KOF Swiss Economic Institute, ETH Zurich, Weinbergstr. 35, 8092, Zurich, Switzerland

Publication date: September 12, 2014

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