The impact of exchange rate volatility on economic growth

This thesis investigates the impact of exchange rate volatility on economic growth. The introduction of floating exchange rates following the collapse of the Bretton-Woods system in 1973 has led to increased uncertainty in global financial markets. This fluctuation in exchange rates affects many key macroeconomic indicators such as inflation, interest rates, trade balances and economic growth. This study aims to analyze how exchange rate fluctuations affect these variables in both advanced and emerging economies. In the case of the Turkish economy, the impact of exchange rate volatility on economic growth is investigated using annual data for the period 2004-2023. Exchange rate volatility is measured with the GARCH(1,1) model constructed with real effective exchange rate data, and then its impact on economic growth is analyzed through the ARDL (Autoregressive Distributed Lag) model. Import, export and inflation variables are included as control variables in the model. The stationarity of the variables is tested with the ADF unit root test and the long-run relationship between the variables is analyzed with the bounds test approach. In addition, the stability of short and long-run coefficient estimates is evaluated by CUSUM and CUSUMSQ tests. The research examines the relationship between exchange rate volatility and macroeconomic performance. Moreover, the thesis investigates the effectiveness of different exchange rate policies in mitigating the negative effects of volatility. The findings of this research contribute to a better understanding of the dynamic relationship between exchange rate fluctuations and macroeconomic stability. The results have important implications for policymakers and suggest strategies to manage exchange rate risks and enhance economic resilience in an increasingly interconnected global economy.