The portfolio balance approach and the Turkish case

Since the beginning of globalization, there has been a massive increase in the number of operations which are made among countries. That?s why the usage of foreign currencies have increased as well. While operating in markets by using foreign currencies, the biggest problem investors and companies face is risk which arise from foreign exchange ambiguity, shortly, foreign exchange risk. Therefore currency forecasting has a great importance, furthermore if we take into account that policymakers use exchange rates as a tool, importance of the subject can be understood even better.There are many different methods which have been used for currency forecasting. But many of them are criticized because of having assumptions which do not explain reality.In this study, models of exchange rate determination are explained first ?including the points which are criticized-. Then, the Portfolio Balance Approach, which is a more recent one and which has more realistic assumptions, and possible policy results within the framework of this approach are explained in detail.In third chapter, foreign exchange movements in Turkey between 2002 and 2008 are explained and it is tested whether these movements can be explained by Portfolio Balance Approach. To do this, the ratio of internal debt stock to monetary base was analyzed and a regression test was performed by using Branson model.As a result, it is showed that, in aforementioned period, foreign exchange movements in Turkey can not be explained within the framework of Portfolio Balance Approach.Key Words:1.Exchange Rate Determination2.Portfolio Balance Approach3.Turkish Economy4.Exchange Rates In Turkey5.Branson Model