Monetary Policy and Exchange Rate Dynamics: Does the Turkish Lira Overshoot?

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ÖZDEMİR B. K., ŞIKLAR İ.

SIYASAL-JOURNAL OF POLITICAL SCIENCES, vol.29, no.2, pp.271-289, 2020 (ESCI) identifier

  • Publication Type: Article / Article
  • Volume: 29 Issue: 2
  • Publication Date: 2020
  • Doi Number: 10.26650/siyasal.2020.29.2.0002
  • Journal Name: SIYASAL-JOURNAL OF POLITICAL SCIENCES
  • Journal Indexes: Emerging Sources Citation Index (ESCI), TR DİZİN (ULAKBİM)
  • Page Numbers: pp.271-289
  • Keywords: SVAR, Monetary Policy Shocks, Exchange Rate, Overshooting, MODELS, PUZZLES, SHOCKS
  • Anadolu University Affiliated: Yes

Abstract

This study aims to identify exogenous shocks in monetary policy and to investigate the impact of these shocks on the exchange rate in the Turkish economy using a VAR model including structural restrictions, referred to as structural VAR (SVAR) model. The empirical model used in the study was developed based on the monetary approach to exchange rate determination and was estimated using monthly data for the period between January 2003 and October 2019. Contrary to past studies conducted for Turkey, this study uses European Union data instead of U.S. data to represent foreign variables. The impulse response functions and variance decompositions obtained as a result of the SVAR model confirm the existence of a strong and almost instant overshooting effect on the Turkish economy for the period in question.