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Before the Fall, Was the Turkish Lira Overvalued?

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  • Irfan Civcir

Abstract

This article examines the validity of purchasing power parity in evaluating whether the Turkish lira was overvalued on the eve of the 2001 crises. Univariate and multivariate time series techniques are used to test whether the real exchange rate is mean reverting. Half-life of deviation from purchasing power parity for various definitions is derived. The Johansen cointegration test is applied to bilateral exchange rates using the consumer price index (CPI) and the wholesale price index (WPI). Finally, various measures of misalignments are calculated, and evidence is provided that calculated half-lives are, in general, short compared to low inflation countries. Furthermore, the data support long-run relationships among exchange rates, domestic prices, and foreign prices. Calculated misalignments give mixed results on bilateral exchange rates based on CPI and WPI. While the WPI-based bilateral real exchange rate gives undervaluation, the CPI-based bilateral real exchange rate and trade-weighted real exchange rates based on WPI reveal that Turkish lira was overvalued before the eve of 2001 crises.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Eastern European Economics.

Volume (Year): 41 (2003)
Issue (Month): 2 (March)
Pages: 69-99

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Handle: RePEc:mes:eaeuec:v:41:y:2003:i:2:p:69-99

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=106044

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Cited by:
  1. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
  2. Levent, Korap, 2007. "Information content of exchange rate volatility: Turkish experience," MPRA Paper 19598, University Library of Munich, Germany.
  3. Levent, Korap, 2007. "Modeling purchasing power parity using co-integration: evidence from Turkey," MPRA Paper 19584, University Library of Munich, Germany.
  4. 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.
  5. Levent KORAP, 2008. "Exchange Rate Determination Of Tl/Us$:A Co-Integration Approach," Istanbul University Econometrics and Statistics e-Journal, Department of Econometrics, Faculty of Economics, Istanbul University, vol. 7(1), pages 24-50, May.
  6. Dağdeviren, Sengül & Ogus Binatli, Ayla & Sohrabji, Niloufer, 2011. "Misalignment under different exchange rate regimes: the case of Turkey," MPRA Paper 46774, University Library of Munich, Germany.
  7. Levent, Korap, 2007. "Analyzing CBRT's FOREX interventions using EGARCH (2001-2006)," MPRA Paper 20634, University Library of Munich, Germany.
  8. Aykut Kibritcioglu & Bengi Kibritcioglu, 2004. "Real Exchange Rate Misalignment in Turkey, 1987-2003 (in Turkish)," Macroeconomics 0403006, EconWPA, revised 09 Mar 2004.

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