The Monetary Models of the Turkish Lira/U.S. Dollar Exchange Rate: Long-run Relationships, Short-run Dynamics, and Forecasting

İrfan Civcir

Eastern European Economics, 2003, vol. 41, issue 6, 43-63

Abstract: This article examines four versions of the monetary model for the Turkish lira/U.S. dollar exchange rate. The analysis focuses on two issues. First, we test whether the exchange rate is cointegrated with the long-run determinants predicted by economic theory. The sticky price versions of the monetary model support the hypothesis of cointegration. Then, we construct simultaneous equation systems that incorporate the long-run equilibrium relationships and complex short-run dynamics. The second issue is the ability of the monetary models to forecast the future exchange rate. We show that a fully dynamic out-of-sample forecast from the equilibrium-correcting monetary models significantly outperforms forecasts from random-walk models and differenced vector autoregressive models.

Date: 2003
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Working Paper: The Monetary Models of the Turkish Lira/Dollar Exchange Rate: Long-run Relationships, Short-run Dynamics and Forecasting (2010)
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