Interactions between FDI and real exchange rates: The case of Turkey

ABSTRACT: The purpose of this thesis is to empirically investigate the relationship between FDI and real exchange rates (RER) by using annual data over the period 1960 and 2012 for the Turkish economy based on Neo-classical theory, Heckscher-Ohlin model and OLI framework. Johansen method for Co integration was applied to test for the long run relationship as well as short run relationship between FDI and RER. Interest rates (IR) have been added as control variable to our analyses. Based on the results estimated, we found strong evidence that real exchange rate level and its volatility have significant effect on annual FDI inflows into Turkey for the examined period. In addition, the results show that interest rate has negative but significant effect on both RER and FDI. The findings also display that if central bank increase interest rates, given that due to rising interest rates there will be less possibilities of amount of foreign capital inflow into country. Therefore it will lead to less supply of foreign exchange into the country of foreign currencies. This in turn leads to a decrease in the value of the national currency. Keywords: FDI, RER, Interest rate, Co-integration, Turkish Economy. …………………………………………………………………………………………………………………………………………………………………………………………………………