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Asymmetric impacts of foreign exchange rate on the demand for money in Turkey: new evidence from nonlinear ARDL

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  • Mouyad Alsamara

    () (Qatar University)

  • Zouhair Mrabet

    () (Qatar University)

Abstract

Using the nonlinear ARDL bounds test for cointegration, this empirical study explores the long and the short run asymmetric impact of exchange rate shocks on the demand for money in Turkey from 1986:Q1 to 2014:Q4. Two specifications of money demand have been investigated that reveal that demand for money is explained by the scale and opportunity cost variables as well as the foreign exchange rate which accounts for currency substitution. In particular, the nonlinear ARDL model provides strong proof for asymmetry by using the bootstrap test. Our findings suggest that the response of money demand to a negative shock in exchange rate (appreciation) was stronger than its reaction to a positive shock (depreciation). Thus, individuals should expect further appreciation when Turkish lira appreciates. In addition, based on the dominated effect of inflation expectation caused by the currency depreciation, monetary policy makers should achieve more stable exchange rates to anchor price fluctuations. Furthermore, the findings of stable money demand behaviour emphasizes the important role of money to conduct an efficient monetary policy and achieve price stability.

Suggested Citation

  • Mouyad Alsamara & Zouhair Mrabet, 2019. "Asymmetric impacts of foreign exchange rate on the demand for money in Turkey: new evidence from nonlinear ARDL," International Economics and Economic Policy, Springer, vol. 16(2), pages 335-356, April.
  • Handle: RePEc:kap:iecepo:v:16:y:2019:i:2:d:10.1007_s10368-018-0421-y
    DOI: 10.1007/s10368-018-0421-y
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    More about this item

    Keywords

    Money demand; Foreign exchange rate; Asymmetry; Nonlinear ARDL;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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