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

Levent, Korap (2008): Exchange rate determination of TL/US$: a co-integration approach. Published in: İstanbul Üniversitesi İktisat Fakültesi Ekonometri ve İstatistik e-Dergisi , Vol. 7, (2008): pp. 24-50.

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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.

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