The Relationship between Exchange Rate and Inflation: An Empirical Study of Turkey

Abderezak Ali Abdurehman and Samet Hacilar
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Abderezak Ali Abdurehman: Department of Banking and Finance, PhD Student, Yildirim Beyazit University, Ankara, Turkey
Samet Hacilar: Scientific Programs Expert, Technological Research Council of Turkey (T B TAK) and PhD Student, Y ld r m Beyaz t University, Ankara, Turkey.

International Journal of Economics and Financial Issues, 2016, vol. 6, issue 4, 1454-1459

Abstract: This paper investigates the relationship between inflation and exchange rate in Turkey. Unlike many empirical studies which make use of the US and Turkey inflation data to test the relationship between inflation and exchange rate in Turkey, this paper employed inflation data of Turkey and the United Kingdom. An ordinary least square (OLS) regression and a simple generalized autoregressive conditional heteroskedasticity (GARCH) model were used to understand the relationship between inflation and exchange rate. The results obtained from OLS regression indicate purchasing power parity (PPP) does not exist in Turkey. However, the existence of ARCH and GARCH in the relationship indicates that the deviations from PPP are not random and follow a certain pattern. Therefore, we conclude that the deviation of PPP might be attributed to certain factors such as transaction cost, government restriction, product specialization or other related factors.

Keywords: Exchange Rate; Inflation; Generalized Autoregressive Conditional Heteroskedasticity Model (search for similar items in EconPapers)
JEL-codes: C87 E31 F31 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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