Exchange rate dynamics in open economies: Turkey case

Exchange rate determining problem came to existence in parallel with abolishing the constraints on financial capital movements that is one of the most important developments in the world finance markets, under the floating exchange rate regime after 1970?s. In this content, in addition to Purchasing Power Parity (PPP). and Mundell Fleming (MF). model; Sticky Price Monetary Approach (SPMA), Flexible Price Monetary Approach (FLMA). and Hybrid Monetary Model (RID). will be analyzed. This study has examined the applicability of the exchange rate determining models on Turkish economy during 1990:Q1 ? 2010:Q2 using unit root test, cointegration techniques and error correction mechanism. Moreover, answer of what are the fundamental macroeconomic variables that affect the exchange rate is also quested. Analyzed models are not harmonized during the period 1990:Q1 ? 2010:Q2. However, generally the variable that is domestic money supply relative to the foreign money supply is found significant. On the other hand, while domestic short run interest rate and relative interest rates are found significant in the models that test the SPMA, relative income is found significant in the models that test RID. According to the results, the role of central authority in determining the exchange rates is weakened after the financial liberalization.Keywords: PPP, SPMA, FLMA, RID, Unit Root, Cointegration, Nominal Exchange Rate, Monetary Policy, Turkish Economy