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Exchange rate determination of TL/US$: a co-integration approach

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  • Levent, Korap

Abstract

In our paper, we investigate exchange rate determination mechanism of TL/US$ for the 1987Q1-2006Q4 period using quarterly observations. Following a large literature review, we first highlight various approaches explaining monetary model exchange rate determination based on economic fundamentals, and then, construct an empirical model revealing both long-run stationary relationships and short-run dynamic adjustment processes of the nominal exchange rate for the Turkish economy. Our findings employing multivariate Johansen-Juselius type co-integrating approach indicate that nominal exchange rate is co-integrated with the fundamentals suggested by economics theory. Besides, short-run deviations from the fundamental-based equilibrium course of the nominal exchange rate have permanent effects on the long-run equilibrium exchange rate, and so have been stemmed from the existence of some form of hysteresis effects dominated in the nominal exchange rate.

Suggested Citation

  • Levent, Korap, 2008. "Exchange rate determination of TL/US$: a co-integration approach," MPRA Paper 19659, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:19659
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    More about this item

    Keywords

    Exchange Rates ; Sticky Price Monetary Model ; Flexible Price Monetary ; Economic Fundamentals ; Randow Walk ; Co-integration ; Hysteresis ; Turkish Economy ;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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