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Misalignment Under Different Exchange Rate Regimes: the Case of Turkey

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Author Info

  • Sengül Dagdeviren
  • Ayla Ogu? Binatli
  • Niloufer Sohrabji

Abstract

The paper examines misalignment of the Turkish lira between 1998 and 2011. We first estimate the equilibrium real exchange rate for Turkey, then compute misalignment and finally test for structural breaks in the misalignment series. Through our tests we find three structural regimes. Our results show that the lira was considerably overvalued in the first regime, which is when Turkey had a fixed exchange rate regime. This was not the case for the periods that had a floating exchange rate. Thus, we confirm that overvalued currencies that have been linked to financial crises are a more serious concern for fixed exchange rate regimes. More importantly, we find that volatility which is a bigger concern in floating regimes is a significant problem for Turkey in the last few years. In fact, the recent dangerously large and rising current account deficits may be a result of volatility rather than overvaluation.

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Bibliographic Info

Article provided by CEPII research center in its journal International Economics/Economie Internationale.

Volume (Year): (2012)
Issue (Month): 130 ()
Pages: 81-98

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Handle: RePEc:cii:cepiei:2012-q2-130-4

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Related research

Keywords: Cointegration; Exchange Rate Misalignment; Structural Breaks; S2S Estimator; Turkey;

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References

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  1. J. Jouini & M. Boutahar, 2003. "Structural breaks in the U.S. inflation process: a further investigation," Applied Economics Letters, Taylor & Francis Journals, vol. 10(15), pages 985-988.
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  13. Rodrigo Caputo G. & Igal Magendzo, 2009. "Do Exchange Rate Regimes Matter For Inflation And Exchange Rate Dynamics? The Case Of Central America," Working Papers Central Bank of Chile 517, Central Bank of Chile.
  14. Ahmad Zubaidi Baharumshah & Evan Lau, 2002. "On the Sustainability of Current Account Deficits: Evidence from Four ASEAN Countries," Working Papers 0062, National University of Ireland Galway, Department of Economics, revised 2002.
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Cited by:
  1. Alper, Ahmet Murat & Civcir, İrfan, 2012. "Can overvaluation prelude to crisis and harm growth in Turkey," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 112-131.

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