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Exchange Rate Determination Of Tl/Us$:A Co-Integration Approach

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  • Levent KORAP

    ()
    (Marmara University Department of Economics)

Abstract

In our paper, we investigate exchange rate determination mechanism of TL/US$ for the 1987Q1-2006Q4 period using quarterly observations. Following a large literature review we first highlight various approaches explaining monetary model exchange rate determination based on economic fundamentals and then construct an empirical model revealing both long-run stationary relationships and short-run dynamic adjustment processes of the nominal exchange rate for the Turkish economy. Our findings employing multivariate Johansen-Juselius type co-integrating approach indicate that nominal exchange rate is co-integrated with the fundamentals suggested by economics theory. Besides, short-run deviations from the fundamental-based equilibrium course of the nominal exchange rate have permanent effects on the long-run equilibrium exchange rate and so have been stemmed from the existence of some form of hysteresis effects dominated in the nominal exchange rate.

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File URL: http://eidergisi.istanbul.edu.tr/sayi7/iueis7m2.pdf
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Bibliographic Info

Article provided by Department of Econometrics, Faculty of Economics, Istanbul University in its journal Istanbul University Econometrics and Statistics e-Journal.

Volume (Year): 7 (2008)
Issue (Month): 1 (May)
Pages: 24-50

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Handle: RePEc:ist:ancoec:v:7:y:2008:i:1:p:24-50

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Web page: http://eidergisi.istanbul.edu.tr
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Keywords: Exchange Rates; Sticky Price Monetary Model; Flexible Price Monetary; Economic Fundamentals; Randow Walk; Co-integration; Hysteresis; Turkish Economy;

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