Real Exchange Rate Volatility on Economic Growth under Intermediate and Flexible Exchange Rate Regimes: Empirical Evidence from Turkey

Abstract

The aim of this paper is to analyze empirically the effects of real exchange rate volatility on economic growth under intermediate and flexible exchange rate regimes in Turkey. The cointegration analysis and error correction models are used to test the long-run relationship and short-run effects respectively. The cointegration analysis shows that there is a long-run relationship between all the variables. The estimation results show that real exchange rate volatility has depressing effects on economic growth in both intermediate and flexible exchange rate regimes. The real exchange rate has positive effects on economic growth in the intermediate exchange rate regime and negative effects on economic growth in the flexible exchange rate regime. The inflation rate and financial deepening have positive effects on economic growth in both of the exchange rate regimes. While interest rate has negative effects on economic growth in the intermediate exchange rate regimes, it has positive effects on economic growth in the flexible exchange rate regime. The error correction models support the long-run relationship between the variables and the variables return to their long-run values in a high speed of adjustment.

Keywords

• Real exchange rate volatility
• Economic growth
• Intermediate exchange rate regime
• Flexible exchange rate regime
• Cointegration
• Error correction model

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