The effects of the exchange rate on consumption and savings in Turkey

Consumption, which is the largest component of GDP and has a secondary impact on the savings of individuals, their future investments and hence the growth rate of an economy, plays a crucial role in macroeconomics. The consumption of political decision-makers continues and the tendency of diversification is aimed at economic growth. This explains why it is important to investigate consumption determinants with disposable income and interest rates in the traditional consumption function. Until recently, much of the literature on consumption has given great importance to the link between consumption and disposable income or interest rate. The results show significant positive coefficients on disposable income and negative coefficient on interest rates. From this point of view, it can be said that political decision makers control consumption through interest rate and disposable income by using appropriate tools. However, Alexander (1952) defines exchange rates as a determinant of consumption. Assuming that there is a long wage delay behind prices, Alexander argues that when prices rise as a result of devaluation, revenue may shift from consumers with high marginal consumption tendencies to producers with low marginal consumption tendencies. Thus, total expenditures are reduced. In this thesis, exchange rate which is another determinant of consumption in consumption function is discussed. The possibility of cointegration between consumption and therefore savings and exchange rates is being investigated. In practice, ARDL limit test approach was used by including exchange rate volatility measured by GARCH model in consumption function. Accordingly, between the years 1998-2018 using quarterly data on consumption and saving of exchange rates in Turkey is shown to be of short and long-term effects. Keywords: Consumption, Savings, Exchange Rate, Exchange Rate Volatility, ARDL Boundary Test Approach, Garch Model.