Investigating the asymmetric effects of exchange rate misalignments on economic growth in Turkey: Insights from threshold effects

This study investigates the impact of real exchange rate (RER) misalignments on Turkey's economic growth, emphasizing threshold effects. Incorporating Hansen’s [“Sample Splitting and Threshold Estimation.” Econometrica 68 (3): 575–603] threshold model, we explore specific levels where misalignment affects growth. Our contributions are threefold: revisiting the symmetric influence of the Turkish Lira on growth, examining asymmetric effects of RER misalignments using the NARDL model to capture non-linear relationships, and applying Hansen’s methodology to pinpoint thresholds where overvaluation or undervaluation fosters or hinders growth. Key findings include: (i) deviations from equilibrium exchange rates negatively impact Turkey’s economic growth; (ii) RER misalignments exhibit asymmetric effects, with overvaluation and undervaluation harming growth in distinct ways; and (iii) thresholds exist for RER misalignment impacts on growth. Moderate misalignments initially boost growth, but excessive deviations reverse these benefits. Overvaluation up to 5.88% supports growth by reducing import costs, but beyond this point, export competitiveness suffers, stifling growth. Undervaluation between 1.10% and 5.88% enhances export competitiveness and attracts investment, yet surpassing 5.88% leads to inflationary pressures and inefficiencies that undermine performance. These findings highlight the importance of managing exchange rates to mitigate adverse effects of excessive misalignment on economic growth.