Purchasing Power Parity and ARIMA Models in Forecasting Exchange Rates: The Case of Turkey

This study aims to forecast the exchange rates of Turkey by using the Purchasing Power Parity theory (PPP) and its competitor the ARIMA models and compare their forecasting powers. In doing so, the models are estimated using the monthly real exchange rate data between Turkish Lira and Turkey's five biggest trading partners (The USA, Germany, England, France and Italy) for the period 1980- 2003 and using the monthly real exchange rate data between Turkish Lira and European Union for the period 1999-2005. The conclusions based on the error terms statistics and the regression coefficients suggest that, compared to the PPP models, the ARIMA models have better forecasting powers.