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The Monetary Model of the Exchange Rate under High Inflation -The case of the Turkish Lira/US Dollar

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  • Irfan Civcir

Abstract

This paper applies the Johansen cointegration technique to examine the validity of the monetary model of exchange-rate determination as an explanation of the Turkish lira/United States dollar relationship over the 1987:1?2000:12 period. A single cointegrating vector is identified whose coefficients conform in broad terms to the restrictions implied by the monetary model, thus lending support to the interpretation of the model as describing a long-run equilibrium relationship. This support is reinforced by the results derived from the adjustment coefficient, which identify a clear short-run tendency of the exchange rate to revert to the equilibrium value defined by the estimated long-run model. After finding support for the long-run monetary model, we calculate misalignment from the estimated long-run relationship to evaluate whether the lira was overvalued before the eve of the 2001 financial crisis in Turkey. Calculated misalignment shows a substantial overvaluation of the lira before the crisis.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 53 (2003)
Issue (Month): 3-4 (March)
Pages: 113-129

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Handle: RePEc:fau:fauart:v:53:y:2003:i:3-4:p:113-129

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Related research

Keywords: exchange rates; monetary model; misalignment; Turkey;

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Cited by:
  1. Levent, Korap, 2008. "Exchange rate determination of TL/US$: a co-integration approach," MPRA Paper 19659, University Library of Munich, Germany.
  2. Aykut Kibritcioglu & Bengi Kibritcioglu, 2004. "Real Exchange Rate Misalignment in Turkey, 1987-2003 (in Turkish)," Macroeconomics 0403006, EconWPA, revised 09 Mar 2004.
  3. Levent, Korap, 2008. "A monetary model of TL/US$ exchange rate: a co-integrating approach," MPRA Paper 20389, University Library of Munich, Germany.

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