Equilibrium exchange rate misalignment and it's effect on economic performance: Analysis of Turkey and BRICS countries

Nominal exchange rate is among the most important factors that play a significant role in foreign trade volume and capital mobilization of countries. Real exchange rate is used to express the value of a currency in terms of its purchasing power. Additionally, any evaluations based on real exchange rate only are not sufficient per se, as equilibrium exchange rate calculations incorporating the economical dynamics are required. The variation between realized real exchange rate and equilibrium exchange rate (i.e. deviation from the equilibrium) provides financial information about economic growth in mid- and long terms. In this context, this study addresses the need in the literature to study and analyze the effect of deviations from real exchange rate and equilibrium level on economic performance. The main purpose of this project is to contribute and provide an extension to the ongoing discussions on the concept of exchange rate and the calculation of exchange rates via panel analysis with structural breaks. The deviation from the equilibrium exchange rate will be examined for Turkey and BRICS countries for the years 1995-2005 and the impact on the economic performance of the dispute will be investigated. In light of the findings from aforesaid analysis, any theoretical relationships between deviation and economic performance will be identified and evidenced. In the calculation of the equilibrium level, both midterm exchange rate represented by Fundamental Equilibrium Exchange Rate and long term which presented by Behavioral Equilibrium Exchange Rate will be used. According to the results of the FEER approach analysis, while countries were at a level close to the equilibrium level since the beginning of the 2000s, they have taken values below or above the equilibrium level by years. While the currencies of Turkey and South Africa were declining positively from the balance level since 2011, Russia and China are valued above the level of balance until 2000. According to the analysis results of the BEER approach, it is observed that the deviation from the balance level is higher than the medium-term equilibrium level FEER. According to the BEER approach, the countries should be expressed as a positive decline from the level of balance in recent years. When the relationship between the deviation values calculated in the FEER - BEER models and economic performance is examined, there is a negative correlation between FEER and economic growth, but no cointegration relationship between growth and BEER deviation analysis. However, the BEER deviation results point to countries' East Asian crisis and global crisis periods.