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Does currency substitution affect exchange rate uncertainty? the case of Turkey

Author

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  • Levent, Korap

Abstract

In this paper, we investigate whether the currency substitution can affect the exchange rate uncertainty for the Turkish economy. Considering the whole time period 1987M01-2006M12 as well as thesub-periods 1987M01-1999M12 and 2001M03-2006M12 for sensitivity analysis, our estimation results employing contemporaneous exponential GARCH (EGARCH) methodology of Nelson (1991) indicate that currency substitution leads to the exchange rate uncertainty. Besides, conditional variance reacts more to past positive shocks than to negative innovations of equal size.

Suggested Citation

  • Levent, Korap, 2007. "Does currency substitution affect exchange rate uncertainty? the case of Turkey," MPRA Paper 20319, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:20319
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    File URL: https://mpra.ub.uni-muenchen.de/20319/1/MPRA_paper_20319.pdf
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    References listed on IDEAS

    as
    1. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    2. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
    3. Domac, Ilker & Mendoza, Alfonso, 2004. "Is there room for foreign exchange interventions under an inflation targeting framework ? Evidence from Mexico and Turkey," Policy Research Working Paper Series 3288, The World Bank.
    4. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.
    5. Akcay, O. Cevdet & Alper, C. Emre & Karasulu, Meral, 1997. "Currency substitution and exchange rate instability: The Turkish case," European Economic Review, Elsevier, vol. 41(3-5), pages 827-835, April.
    6. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    7. Faruk Seļuk, 1997. "GMM estimation of currency substitution in a high-inflation economy: evidence from Turkey," Applied Economics Letters, Taylor & Francis Journals, vol. 4(4), pages 225-227.
    8. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
    9. Ilker Domac & Mohsen Bahmani-Oskooee, 2002. "between Dollarization and Inflation : Evidence from Turkey," Discussion Papers 0207, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    10. Choudhry, Taufiq, 1995. "High inflation rates and the long-run money demand function: Evidence from cointegration tests," Journal of Macroeconomics, Elsevier, vol. 17(1), pages 77-91.
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    More about this item

    Keywords

    Exchange rate ; dollarization ; currency substitution ; inflation ; exponential GARCH models ; conditional variance ; leverage effect ; Turkish economy ;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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