The monetary models of the Turkish Lira/US dollar exchange rate - Long-run relationships, short-run dynamics, and forecasting

CİVCİR İ.

EASTERN EUROPEAN ECONOMICS, vol.41, no.6, pp.43-69, 2003 (SSCI, Scopus) identifier identifier

  • Publication Type: Article / Article
  • Volume: 41 Issue: 6
  • Publication Date: 2003
  • Doi Number: 10.1080/00128775.2003.11041064
  • Journal Name: EASTERN EUROPEAN ECONOMICS
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.43-69
  • Ankara University Affiliated: Yes

Abstract

This article examines four versions of the monetary model for the Turkish lira/U.S. dollar exchange rate. The analysis focuses on two issues. First, we test whether the exchange rate is cointegrated with the long-run determinants predicted by economic theory. The sticky price versions of the monetary model support the hypothesis of cointegration. Then, we construct simultaneous equation systems that incorporate the long-run equilibrium relationships and complex short-run dynamics. The second issue is the ability of the monetary models to forecast the future exchange rate. We show that a fully dynamic out-of-sample forecast from the equilibrium-correcting monetary models significantly outperforms forecasts from random-walk models and differenced vector autoregressive models.