Assessment of causality between foreign exchange rate and macroeconomic variables in Turkey

Exchange rate is the value of a foreign currency in relation to the domestic currency or the value of the domestic currency in relation to a foreign currency. With the impact of globalization, foreign exchange rates have been used more actively on an international level, which in turn increased their importance and foreign exchange rates began to influence macroeconomic variables of countries. In Turkey, trade liberalization which began in 1980s defined a significant role for foreign exchange rates in the economy. The purpose of this study is to examine within a theoretical framework the impact of foreign exchange rate changes on macroeconomic variables in Turkey between 1980 and 2017, moving onto an econometric analysis based on annual data. To serve this purpose, Augmented Dickey-Fuller (ADF) unit root test was used to stabilize the time series of real foreign exchange rates and macroeconomic variables. The causal relation between time series stabilized with the unit root test was analyzed with the Toda-Yamamoto causality test. The results of the Toda-Yamamoto causality test do not show a causal relationship between real foreign exchange rate and final consumption expenditure. As a result of the test, no causal relationship was observed between real exchange rate and export/ import coverage ratios, in other words foreign trade. The causality test demonstrated a causal relationship between real foreign exchange rate and consumer price index. As a result of the analysis, a causal relationship was found between real foreign exchange rate and interest rate. As a result of the test, no causal relationship was discovered between real foreign exchange and unemployment rate. The causality test did not show any causal relationship between real foreign exchange rate and growth rate. Empirical findings based on the study led to the conclusion that foreign exchange rates in Turkey have an impact in certain macroeconomic variables.