THE EFFECT OF EXCHANGE RATE VOLATILITY ON ECONOMIC GROWTH IN TURKEY

Year 2020, Volume: 9 Issue: 1, 42 - 51, 30.03.2020

Erkan Ozata

https://doi.org/10.17261/Pressacademia.2020.1191

Abstract

Purpose - Exchange rate volatility, which is defined as continuous fluctuations in exchange rates, has been frequently discussed in the literature recently due to its effects on developing economies. Exchange rate volatility is costly to the domestic economy through its direct and indirect effects on households and firms. Turkey implied different exchange rate regimes between 1980 and 2019. Also the use of exchange rate as a policy tool for fighting against inflation or current account deficit has increased exchange rate volatility in Turkey. The review of literature on the impact of exchange rate volatility on economic growth provides mixed results. The impact differs from developed to developing countries. The purpose of this study is to examine the impact of exchange rate volatility on economic growth in Turkey between 1998:Q1 and 2019:Q3.
Methodology - This paper uses an Autoregressive Distributed Lag (ARDL) Model to analyze the effect of exchange rate volatility on economic growth in Turkey. Volatility of exchange rate is calculated from the real effective exchange rate by using the GARCH (1,1) model. ARDL model and the bounds testing approach has some advantages over other conventional cointegration approaches. Lagrange Multiplier (LM) test for autocorrelation and Ramsey RESET test for specification error were applied. One last diagnostic test of CUSUM and CUSUMSQ are used to check the stability of the short run and long run coefficient estimates.
Findings- Estimation results of ARDL model show that real effective exchange rate volatility has a negative and highly statistically significant effect on economic growth in Turkey. From the long run coefficients export and investment have a significant positive effect on real GDP, import and exchange rate volatility have significant negative effect on real GDP.
Conclusion- In order to ensure sustainable economic growth, it is necessary to strengthen the fiscal and financial structure and reduce the volatility in exchange rates. Financial deepening and fiscal discipline are very important in this respect. Changing the production structure and investing in education and high technology, increasing the domestic production of intermediate goods are also required for achieving high growth rates.

Keywords

Exchange rates, volatility, economic growth, ARDL

References

• Adeniyi, A. P., and Olasunkanmi, A. Olasoji. (2019). Impact of Exchange Rate Volatility on Economic Growth in Nigeria. International Journal Management Studies and Social Science Research, 1(4), 43–48.
• Ahiabor, G., and Amoah, A. (2019). Examining the Effect of Real Effective Exchange Rate Volatility on Economic Growth : Evidence From Ghana. Journal of Economics and Economic Education Research, 20(1), 1–14.
• Alagidede, Paul and Ibrahim, Muazu. (2016). On the causes and effects of exchange rate volatility on economic growth: Evidence from Ghana. 10.13140/RG.2.1.3300.0722..
• Bahmani-Oskooee, M., and Xi, D. (2012). Exchange rate volatility and domestic consumption: Evidence from Japan. Economic Systems, 36(2), 326–335. https://doi.org/10.1016/j.ecosys.2011.10.004
• Bleaney, M., and Greenaway, D. (2001). The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa. Journal of Development Economics, 65(2), 491–500. https://doi.org/10.1016/S0304-3878(01)00147-X
• Bollerslev, T. (1986). Generalised Autoregressive Conditional Heteroscedasticity. Journal of Econometrics.
• Brown, R., Durbin, J., and Evans, J. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society, 37(2), 149–192. https://doi.org/10.2307/2984889
• Demir, F. (2013). Growth under exchange rate volatility: Does access to foreign or domestic equity markets matter? Journal of Development Economics, 100(1), 74–88. https://doi.org/10.1016/j.jdeveco.2012.08.001
• Engle, R. F. (1982). Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation. Econometrica. https://doi.org/10.2307/1912773
• Engle, R. F., and Granger, C. W. J. (1987). Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55(2), 251. https://doi.org/10.2307/1913236
• Eteng F.O. and Ijim-Agbor U. (2016). International Journal of Humanities and Social Science Research, 43–48.
• Hussain, Z. J., and Farooq, M. (2009). Economic growth and exchange rate volatilityin the case of Pakistan. Pakistan Journal of Life and Social Sciences, 7(2), 112–118.
• Johansen, Soren. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59(6), 1551. https://doi.org/10.2307/2938278
• Johansen, Søren, and Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration — With Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52(2), 169–210. https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x
• Kasman, A., and Kasman, S. (2005). Exchange Rate Uncertainty in Turkey and its Impact on Export Volume. METU Studies in Development, 32(1), 41–53.
• McKinnon, R. (1963). Optimum Currency Areas. The American Economic Review, 53(4), 717–725.
• Musyoki, D., Pokhariyal, G. P., and Pundo, M. (2012). The Impact of real exchange rate misalignment on economic Growth: Kenyan evidence. Research Journal of Finance and Accounting, 7(1), 59–75.
• Obstfeld, M., and Rogoff, K. (1995). Exchange rate dynamics redux. Journal of Political Economy. https://doi.org/10.1086/261997
• Odili, O. (2015). Real Exchange Rate Volatility, Economic Growth and International Trade in an Emerging Market Economy: Evidence from Nigeria. International Journal of Academic Research in Business and Social Sciences, 5(7), 179–201. https://doi.org/10.6007/ijarbss/v5-i7/1730
• Pesaran, M. H., Shin, Y. (1999). An autoregressive distributed lag modelling approach to cointegration analysis. In Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium. (pp. 1–31). https://doi.org/10.1017/CCOL521633230
• Pesaran, M. H., Shin, Y., and Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616
• Sabina, N. E., Manyo, T. S., and Ugochukwu, U. S. (2017). “Exchange Rate Volatility and Economic Growth in Nigeria.” International Journal of Economics, Commerce and Management, 5(7), 583–595.
• Schnabl, G. (2008). Exchange rate volatility and growth in small open economies at the EMU periphery. Economic Systems, 32(1), 70–91. https://doi.org/10.1016/j.ecosys.2007.06.006
• Umaru, H., A, A. N., and Davies, N. O. (2018). The Effects of Exchange Rate Volatility on Economic Growth of West African English-Speaking Countries. International Journal of Academic Research in Accounting, Finance and Management Sciences, 8(4), 131–143. https://doi.org/10.6007/IJARAFMS/v8-i4/5470
• Yıldız, H., Ide, G., and Malik, S. T. (2016). The Relationship Between Exchange Rate Volatility and Economic Growth : an Example of Turkey. International Journal of Arts and Commerce, 5(3), 47–61.