The Monetary Model of the Exchange Rate under High Inflation -The case of the Turkish Lira/US Dollar
Year: 2003 Volume: 53 Issue: 3 -4 Pages: 113-129
Abstract: This paper applies the Johansen cointegration technique to examine the validity of the monetary model of exchange-rate determination as an explanation of the Turkish lira/United States dollar relationship over the 1987:1?2000:12 period. A single cointegrating vector is identified whose coefficients conform in broad terms to the restrictions implied by the monetary model, thus lending support to the interpretation of the model as describing a long-run equilibrium relationship. This support is reinforced by the results derived from the adjustment coefficient, which identify a clear short-run tendency of the exchange rate to revert to the equilibrium value defined by the estimated long-run model. After finding support for the long-run monetary model, we calculate misalignment from the estimated long-run relationship to evaluate whether the lira was overvalued before the eve of the 2001 financial crisis in Turkey. Calculated misalignment shows a substantial overvaluation of the lira before the crisis.
JEL classification: F31; F41; F47
Keywords: exchange rates; monetary model; misalignment; Turkey
RePEc: n/a
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