Analysis of equilibrium exchange rate model estimates in turkey

In the period following the end of the Bretton Woods system, countries' adoption of the flexible exchange rate system enhances the importance of exchange rates considering the increase in liberalization movements, developments in technology and informatics as well as the impact of social media today. The real exchange rate expressed as the comparative price of the goods of the two countries also has an impact on many macroeconomic variables besides being accepted as an indicator of countries' competitiveness in foreign trade. It is also important to model the equilibrium real exchange rate, which cannot be directly observed as well as the real exchange rate. As a matter of fact, the deviation of the real exchange rate from the balance value directly affects the competitiveness of a country, and thus, the increase in the current account deficit causes speculative attacks and currency crises. The aim of this study is to estimate the equilibrium real exchange rate for Turkey in line with selected models. For this purpose, the traditional and modern exchange rate models explaining the exchange rate formation and the balance real exchange rate were modelled. Purchasing Power Parity (PPP) and Flexible Price Monetary Model (FPMM) from traditional models, and Fundamental Equilibrium Exchange Rate (FEER) and Behavioural Equilibrium Exchange Rate (BEER) from modern methods were addressed. Purchasing Power Parity Theory, which allows the measurement of deviations from the value of the national currency and the competitiveness of the country to be evaluated by comparison with the exchange rates in the market, is an important indicator for long-term equilibrium exchange rate. In the study, the validity of the Purchasing Power Parity Theory was tested through traditional unit root tests and nonlinear Fourier unit root tests developed by Enders, Becker, Lee (2006), and it was found that the Purchasing Power Parity Theory was valid in Turkey. In this case, the deviations to be experienced in the real exchange rate are not permanent. Despite the return to the balance value depending on the developments in the economy, the real exchange rate deviates from the different degrees of balance values in the calculations made for the selected FPMM, FEER and BEER models. It has been concluded that FEER and BEER models, one of the modern methods explaining the exchange rate, are more successful than FPMM, which is one of the traditional models. When the course of deviations from the calculated equilibrium real exchange rate is analysed, the FEER model reflects the value of the Turkish lira better than the other models during the 2008 Global Financial Crisis. The BEER model has been very successful in showing the depreciation of the Turkish lira as a result of increased political risk in both 2016 and the third quarter of 2018. The difference of this study from other studies is the first study to examine the period in which the inflation targeting strategy and flexible exchange rate system were implemented in calculating the equilibrium real exchange rate for Turkey, and to model the period after 2016. Although PPP Theory is valid for Turkey, the long-term coefficients obtained from the selected models (FPMM, FEER and BEER models) were found statistically insignificant. In general, equilibrium real exchange rate models do not give successful results because the formation of exchange rates are effective not only by macroeconomic variables but also in non-macroeconomic factors. Keywords: Equilibrium Real Exchange Rate, Real Exchange Rate, Fourier Unit Root, ARDL Bounds Test Model