The monetary model of the exchange rate under high inflation - The case of the Turkish Lira US dollar

CİVCİR İ.

FINANCE A UVER, cilt.53, sa.3-4, ss.113-129, 2003 (SSCI) identifier identifier

  • Yayın Türü: Makale / Tam Makale
  • Cilt numarası: 53 Sayı: 3-4
  • Basım Tarihi: 2003
  • Dergi Adı: FINANCE A UVER
  • Derginin Tarandığı İndeksler: Social Sciences Citation Index (SSCI), Scopus
  • Sayfa Sayıları: ss.113-129
  • Anahtar Kelimeler: exchange rates, monetary model, misalignment, Turkey, PURCHASING-POWER-PARITY, LONG-RUN, MEAN-REVERSION, RECENT FLOAT, TIME-SERIES, 2 CENTURIES, UNIT-ROOT, COINTEGRATION, TESTS, FUNDAMENTALS
  • Ankara Üniversitesi Adresli: Evet

Özet

This paper applies the Johansen cointegration technique to examine the validity of the monetary model of exchange-rate determination as an explanation of the Turkish lira/United States dollar relationship over the 1987:1-2000:12 period. A single cointegrating vector is identified whose coefficients conform in broad terms to the restrictions implied by the monetary model, thus lending support to the interpretation of the model as describing a long-run equilibrium relationship. This support is reinforced by the results derived from the adjustment coefficient, which identify a clear short-run tendency of the exchange rate to revert to the equilibrium value defined by the estimated long-run model. After finding support for the long-run monetary model, we calculate misalignment from the estimated long-run relationship to evaluate whether the lira was overvalued before the eve of the 2001 financial crisis in Turkey. Calculated misalignment shows a substantial overvaluation of the lira before the crisis.