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The Long-Run Validity of the Monetary Exchange Rate Model for a High Inflation Country and Misalignment : The Case of Turkey

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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-U.S. dollar relationship over 1987:1-2000:12. A single cointegrating vector is identified, lending support to the interpretation of the model as describing a long-run equilibrium relationship. We also test for weak exogeneity of the nominal exchange rates and monetary fundamentals from the estimated vector error correction models. This gives us insight into the adjustment process through which the long-run equilibrium relationship between exchange rates and monetary fundamentals is maintained. In addition, we calculate misalignment from estimating the long-run relationship to evaluate whether the lira was overvalued before the eve of the 2001 financial crisis in Turkey. Calculated misalignment figures show substantial overvaluation before the crisis.

Suggested Citation

  • Irfan Civcir, 2004. "The Long-Run Validity of the Monetary Exchange Rate Model for a High Inflation Country and Misalignment : The Case of Turkey," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 40(4), pages 84-100, July.
    • Handle: RePEc:mes:emfitr:v:40:y:2004:i:4:p:84-100
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    Cited by:

    1. Egert, Balazs, 2005. "Equilibrium exchange rates in South Eastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased?," Economic Systems, Elsevier, vol. 29(2), pages 205-241, June.
    2. Irfan Civcir, 2003. "The Monetary Models of the Turkish Lira/U.S. Dollar Exchange Rate: Long-run Relationships, Short-run Dynamics, and Forecasting," Eastern European Economics, Taylor & Francis Journals, vol. 41(6), pages 43-63, January.
    3. Mohsen Bahmani‐Oskooee & Scott W. Hegerty & Altin Tanku, 2010. "The Black‐Market Exchange Rate Versus The Official Rate: Which Rate Fosters The Adjustment Speed In The Monetarist Model?," Manchester School, University of Manchester, vol. 78(6), pages 725-738, December.
    4. Korap, Levent, 2024. "Impact of asymmetry on exchange rate determination: The role of fundamentals," Emerging Markets Review, Elsevier, vol. 63(C).
    5. Khalid, Waqar & Civcir, Irfan & Özdeşer, Hüseyin & Iqbal, Javed, 2023. "The asymmetric impact of real exchange rate misalignment on growth dynamics in Turkey," Journal of Policy Modeling, Elsevier, vol. 45(6), pages 1184-1203.
    6. Lee, Chin & M., Azali, 2005. "Exchange rate misalignments in ASEAN-5 countries," MPRA Paper 59169, University Library of Munich, Germany.
    7. Lee, Chin & M., Azali & Yusop, Zulkornain & Yusoff, Mohammed, 2008. "Is Malaysia exchange rate misalignment before the 1997 crisis?," MPRA Paper 40430, University Library of Munich, Germany.
    8. Jose Eduardo de A. Ferreira, 2006. "Effects of Fundamentals on the Exchange Rate: A Panel Analysis for a Sample of Industrialised and Emerging Economies," Studies in Economics 0603, School of Economics, University of Kent.
    9. Xie, Zixiong & Chen, Shyh-Wei, 2019. "Exchange rates and fundamentals: A bootstrap panel data analysis," Economic Modelling, Elsevier, vol. 78(C), pages 209-224.
    10. Egert, Balazs, 2005. "Equilibrium exchange rates in South Eastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased?," Economic Systems, Elsevier, vol. 29(2), pages 205-241, June.
    11. Ahmet Ugur & Yusuf Ekrem Akbas & Mehmet Senturk, 2014. "Long Term Validity of Monetary Exchange Rate Model: Evidence from Turkey," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(51), pages 111-136, March.

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