Exchange rate determination models: The example of Turkey

Trade in goods and services between countries, capital flows as well as many macroeconomic variables are of great importance in determining the exchange rates traded in national and international markets. It is seen that the amount of money in national and international markets, interest rates determined by central banks, growth and inflation rates affect exchange rates. There are many models developed in the literature regarding the determination of the exchange rate. The aim of the study is to investigate which of the developed models related to the determination of the exchange rate is valid for Turkey. In the study, purchasing power parity model 2003:01 – 2021:10 period, Mundell – Flemming model 2006:01 – 2021:09 period, monetary model with flexible price assumption 2005:09 – 2021:05 period, and monetary hybrid model 2006:01 – 2021:05 period were analyzed for the period of 2006:01 – 2021:05. Fourier ARDL and ARDL cointegration tests were used in the analysis of the data. As a result of the analyzes, it was found that real variables did not affect the exchange rate much, that the activity was mostly due to the financial system, and that the change in the money supply and the interest rate affected the exchange rate. It is seen that exchange rates are affected by the exchange rate values of the past period. It has been concluded that monetarist approaches are more explanatory in explaining exchange rate changes, and even that the monetarist hybrid model has the highest explanatory power for Turkey. As a result of the study, it was found that the exchange rate is sticky. From this point of view, it can be suggested to observe transparency during the determination and execution of exchange rate policies and to increase confidence in the Central Bank. Key Words: Exchange Rate, PPP, Monetary Theory, ARDL, Fourier ARDL