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The Relationship between Exchange Rate and Inflation: An Empirical Study of Turkey

Author

Listed:
  • Abderezak Ali Abdurehman

    (Department of Banking and Finance, PhD Student, Yildirim Beyazit University, Ankara, Turkey)

  • Samet Hacilar

    (Scientific Programs Expert, Technological Research Council of Turkey (TÜBÝTAK) and PhD Student, Yýldýrým Beyazýt University, Ankara, Turkey.)

Abstract

This paper investigates the relationship between inflation and exchange rate in Turkey. Unlike many empirical studies which make use of the US and Turkey inflation data to test the relationship between inflation and exchange rate in Turkey, this paper employed inflation data of Turkey and the United Kingdom. An ordinary least square (OLS) regression and a simple generalized autoregressive conditional heteroskedasticity (GARCH) model were used to understand the relationship between inflation and exchange rate. The results obtained from OLS regression indicate purchasing power parity (PPP) does not exist in Turkey. However, the existence of ARCH and GARCH in the relationship indicates that the deviations from PPP are not random and follow a certain pattern. Therefore, we conclude that the deviation of PPP might be attributed to certain factors such as transaction cost, government restriction, product specialization or other related factors.

Suggested Citation

  • Abderezak Ali Abdurehman & Samet Hacilar, 2016. "The Relationship between Exchange Rate and Inflation: An Empirical Study of Turkey," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1454-1459.
  • Handle: RePEc:eco:journ1:2016-04-24
    as

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    References listed on IDEAS

    as
    1. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," Working Papers Central Bank of Chile 409, Central Bank of Chile.
    2. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
    3. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
    4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    5. Erdinc Telatar & Hasan Kazdagli, 1998. "Re-examine the long-run purchasing power parity hypothesis for a high inflation country: the case of Turkey 1980-93," Applied Economics Letters, Taylor & Francis Journals, vol. 5(1), pages 51-53.
    6. Alper Aslan & Ferit Kula & Huseyin Kalyoncu, 2010. "Additional evidence of long-run purchasing power parity with black and official exchange rates," Applied Economics Letters, Taylor & Francis Journals, vol. 17(14), pages 1379-1382.
    7. Ferhat Arslaner & Dogan Karaman & Nuran Arslaner & Suleyman Hilmi Kal, 2014. "The Relationship between Inflation Targeting and Exchange Rate Pass-Through in Turkey with a Model Averaging Approach," Working Papers 1416, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    8. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    9. Alba, Joseph D. & Park, Donghyun, 2005. "An empirical investigation of purchasing power parity (PPP) for Turkey," Journal of Policy Modeling, Elsevier, vol. 27(8), pages 989-1000, November.
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    More about this item

    Keywords

    Exchange Rate; Inflation; Generalized Autoregressive Conditional Heteroskedasticity Model;

    JEL classification:

    • C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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