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Asymmetric impacts of foreign exchange rate on the demand for money in Turkey: new evidence from nonlinear ARDL

Mouyad Alsamara () and Zouhair Mrabet ()
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Mouyad Alsamara: Qatar University
Zouhair Mrabet: Qatar University

International Economics and Economic Policy, 2019, vol. 16, issue 2, No 3, 335-356

Abstract: Abstract Using the nonlinear ARDL bounds test for cointegration, this empirical study explores the long and the short run asymmetric impact of exchange rate shocks on the demand for money in Turkey from 1986:Q1 to 2014:Q4. Two specifications of money demand have been investigated that reveal that demand for money is explained by the scale and opportunity cost variables as well as the foreign exchange rate which accounts for currency substitution. In particular, the nonlinear ARDL model provides strong proof for asymmetry by using the bootstrap test. Our findings suggest that the response of money demand to a negative shock in exchange rate (appreciation) was stronger than its reaction to a positive shock (depreciation). Thus, individuals should expect further appreciation when Turkish lira appreciates. In addition, based on the dominated effect of inflation expectation caused by the currency depreciation, monetary policy makers should achieve more stable exchange rates to anchor price fluctuations. Furthermore, the findings of stable money demand behaviour emphasizes the important role of money to conduct an efficient monetary policy and achieve price stability.

Keywords: Money demand; Foreign exchange rate; Asymmetry; Nonlinear ARDL (search for similar items in EconPapers)
JEL-codes: E41 E32 C22 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10368-018-0421-y

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Handle: RePEc:kap:iecepo:v:16:y:2019:i:2:d:10.1007_s10368-018-0421-y