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Misalignment under different exchange rate regimes: the case of Turkey

  • Dağdeviren, Sengül
  • Ogus Binatli, Ayla
  • Sohrabji, Niloufer

The paper examines misalignment of the Turkish lira between 1998 to 2008. Misalignment, specifically overvaluation has been linked to fixed exchange rate regimes. By studying the case of Turkey during this period which covers both a fixed and floating exchange rate regime, we contribute to the literature on the relation between misalignment and exchange rate regimes. We first estimate the equilibrium real exchange rate for Turkey, then compute misalignment and finally test for structural breaks in the misalignment series. Through our tests we find three structural regimes which we call the pre-crisis period, the transition period and the post-crisis period. We find considerable overvaluation in first regime, which is when Turkey had a fixed exchange rate regime. This was not the case for the periods that had floating exchange rates. Thus, we conclude that overvalued currencies that have been linked to financial crises are a more serious concern for fixed exchange rate regimes.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46774.

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Date of creation: 07 Jul 2011
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Publication status: Published in Economie Internationale 130.2012(2012): pp. 81-98
Handle: RePEc:pra:mprapa:46774
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  1. Elena Loukoianova & Plamen Iossifov, 2007. "Estimation of a Behavioral Equilibrium Exchange Rate Model for Ghana," IMF Working Papers 07/155, International Monetary Fund.
  2. Virginie Coudert & Cécile Couharde, 2008. "Currency Misalignments and Exchange Rate Regimes in Emerging and Developing Countries," Working Papers 2008-07, CEPII research center.
  3. Kemme, David M. & Roy, Saktinil, 2006. "Real exchange rate misalignment: Prelude to crisis?," Economic Systems, Elsevier, vol. 30(3), pages 207-230, October.
  4. Ayla Ogus & Niloufer Sohrabji, 2008. "Analyzing the Present Sustainability of Turkey’s Current Account Position," Working Papers 0803, Izmir University of Economics.
  5. Deniz Atasoy & Sweta C. Saxena, 2005. "Misaligned? Overvalued? The Untold Story of the Turkish Lira," International Finance 0508002, EconWPA.
  6. Irfan Civcir, 2003. "Before the Fall, Was the Turkish Lira Overvalued?," Eastern European Economics, M.E. Sharpe, Inc., vol. 41(2), pages 69-99, March.
  7. Ilan Goldfajn & Rodrigo Valdés, 1997. "The Aftermath of Appreciations," Working Papers Central Bank of Chile 02, Central Bank of Chile.
  8. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  9. J. H. Eita & Moses M. Sichei, 2006. "Estimating the Equilibrium Real Exchange Rate for Namibia," Working Papers 200608, University of Pretoria, Department of Economics.
  10. Ahmad Zubaidi Baharumshah & Evan Lau, 2002. "On the Sustainability of Current Account Deficits: Evidence from Four ASEAN Countries," Working Papers 0062, National University of Ireland Galway, Department of Economics, revised 2002.
  11. Ronald Macdonald & Luca Antonio Ricci, 2004. "Estimation Of The Equilibrium Real Exchange Rate For South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 282-304, 06.
  12. Alper, C. Emre & Saglam, Ismail, 1999. "The Equilibrium Real Exchange Rate: Evidence from Turkey," MPRA Paper 1924, University Library of Munich, Germany.
  13. Jean-Francois Hoarau & Ibrahim Ahamada & Alain Nurbel, 2007. "Multiple structural regimes in real exchange rate misalignment: the case of Australian dollar," Applied Economics Letters, Taylor & Francis Journals, vol. 15(2), pages 101-104.
  14. Claudio Paiva, 2006. "External Adjustment and Equilibrium Exchange Rate in Brazil," IMF Working Papers 06/221, International Monetary Fund.
  15. Rodrigo Caputo G. & Igal Magendzo, 2009. "Do Exchange Rate Regimes Matter For Inflation And Exchange Rate Dynamics? The Case Of Central America," Working Papers Central Bank of Chile 517, Central Bank of Chile.
  16. Lucio Sarno, 2000. "Real exchange rate behaviour in high inflation countries: empirical evidence from Turkey, 1980-1997," Applied Economics Letters, Taylor & Francis Journals, vol. 7(5), pages 285-291.
  17. J. Jouini & M. Boutahar, 2003. "Structural breaks in the U.S. inflation process: a further investigation," Applied Economics Letters, Taylor & Francis Journals, vol. 10(15), pages 985-988.
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