The effect of exchange rate volatility on economic growth in Turkey

Abstract

Purpose -Exchange rate volatility, which is defined as continuous fluctuations in exchange rates, has been frequently discussed in the literature recently due to its effects on developing economies. Exchange rate volatility is costly to the domestic economy through its direct and indirect effects on households and firms. Turkey implied different exchange rate regimes between 1980 and 2019. Also the use of exchange rate as a policy tool for fighting against inflation or current account deficit has increased exchange rate volatility in Turkey. The review of literature on the impact of exchange rate volatility on economic growth provides mixed results. The impact differs from developed to developing countries. The purpose of this study is to examine the impact of exchange rate volatility on economic growth in Turkey between 1998:Q1 and 2019:Q3. Methodology -This paper uses an Autoregressive Distributed Lag (ARDL) Model to analyze the effect of exchange rate volatility on economic growth in Turkey. Volatility of exchange rate is calculated from the real effective exchange rate by using the GARCH (1,1) model. ARDL model and the bounds testing approach has some advantages over other conventional cointegration approaches. Lagrange Multiplier (LM) test for autocorrelation and Ramsey RESET test for specification error were applied. One last diagnostic test of CUSUM and CUSUMSQ are used to check the stability of the short run and long run coefficient estimates. Findings-Estimation results of ARDL model show that real effective exchange rate volatility has a negative and highly statistically significant effect on economic growth in Turkey. From the long run coefficients export and investment have a significant positive effect on real GDP, import and exchange rate volatility have significant negative effect on real GDP. Conclusion-In order to ensure sustainable economic growth, it is necessary to strengthen the fiscal and financial structure and reduce the volatility in exchange rates. Financial deepening and fiscal discipline are very important in this respect. Changing the production structure and investing in education and high technology, increasing the domestic production of intermediate goods are also required for achieving high growth rates.

Volatility Exchange Rate and Economic Growth: Insight from ASEAN Member Countries

“…The analysis method used in the model is the path analysis. According to Ozata (2020), as for the model in this study, it can be written as follows: ln GDP = α + β1 ln Exp-inv + β2 ln Imp-inv + β3 Volex + εt GDP is Real Gross Domestic Product/economic growth Exp-inv is the export investment of goods and services Imp-inv is an import investment of goods and services Volex is the volatility exchange rate and calculated from the real effective exchange rate.…”

Impact of Neighbouring Currencies on Nigeria’s Currency Instability

“…The exchange rate compares one currency to another at the point of trading (Ozata, 2020). The value of a currency is a crucial economic variable that influences both the cost of locally produced goods on global markets and the cost of imported goods on home markets (Khordehfrosh & Mansour, 2015).…”

The Effect of Real Exchange Rate on Current Account

“…The results show that fiscal position and oil revenues are the main determinants of equilibrium in the current account. Ozata (2020) examines the effect of exchange rate on economic growth in Turkey for the quarterly period 1998 -2019, using the Autoregressive Distributed Lag (ARDL) Model. The findings of the applied model show that the volatility of the exchange rate is statistically significantly negatively affecting economic growth in Turkey.…”