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

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 <italic>et al.</italic> (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.