Relationships between macroeconomic indicators and exchange rate

The exchange rate is one of the crucial indicators of a country's economic health and international competitiveness. The real effective exchange rate, however, shows a country's currency value relative to other countries' currencies by calculating a trade-weighted average, thus playing a critical role in understanding international trade and investment flows. The real effective exchange rate provides a more comprehensive evaluation by taking into account not only nominal exchange rates but also changes in the price levels of relevant countries. This study examines the relationships between macroeconomic indicators, particularly money supply, unemployment, economic growth, trade balance, and the real effective exchange rate. The main objective of the thesis is to analyze the interaction between these factors and to highlight their effects on economic stability and the exchange rate. In this context, Toda-Yamamoto Causality and ARDL Cointegration Analyses were applied to monthly frequency data from January 2012 to December 2023, and short and long-term results were obtained using Error Correction Model. When the results of the research are evaluated in methodological order, it is concluded that in terms of causality relationships, money supply and industrial production are the causes of the real effective exchange rate. Upon evaluating the effects of money supply on the real effective exchange rate, it is found that the negative impact in the short term turns positive in the long term. The ratio of exports to imports, representing the trade balance, was found to have a negative impact on the real effective exchange rate only in the short term. Changes in industrial production, representing growth, were found to have a positive short-term and negative long-term effect on the real effective exchange rate. The unemployment rate did not have a significant impact on the real effective exchange rate in either the short or long term.