Causality relationship between exchange rate and industrial production: An application on Turkey (2005-2019)

As each country uses different currencies in international trade, when doing business, countries need to know the "exchange rate", which is the value of their own currency in terms of the currencies used by foreign countries. Exchange rates are among the most important indicators and prices in an open economy due to their strong effects on current account and other macroeconomic variables in an environment where economic uncertainties increase with globalization. Exchange rates affect the production quantity and value of countries in the industrial sector positively or negatively. Although there are many factors that determine foreign trade, price (exchange) flexibility of foreign trade is the most important factor in real life. The purpose of this study, with exchange rate of industrial production in Turkey in the years 2005-2019 to determine whether there is any relation to an econometric analysis. For this purpose the relationship between the exchange rate of industrial production in Turkey, CPI Based Real Effective Exchange Rate (2003 = 100) and the Industrial Production Index, total industry (2010 = 100) variables 2005: Q1-2019: Q1 between the three-month period were examined by applying the time-series data analysis. Then, long-term relationship between variables was analyzed by EngleGranger and Phillips-Ouliaris cointegration tests and Toda-Yamamoto (1995) causality test was performed on the variables. As a result of the tests, a long-term cointegration relationship was found between exchange rate and industrial production, but no causality relationship was found. Keywords Exchange Rate, Industrial Production, Time Series Analysis