EXCHANGE RATE DETERMINATION OF TL/US$:A CO-INTEGRATION APPROACH

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