Influence of Exchange Rate on the Economic Growth in the Turkish Economy

Vol.11,No.1(2020)

Özcan Karahan

https://doi.org/10.5817/FAI2020-1-2

PDF
Abstract
The traditional view asserts that there is a positive relationship between the foreign exchange rate and economic growth. So much so that an increase in foreign exchange rates enhances the net export volume and thus positively affects economic growth due to the increasing total demand. However, structural economists argue that there is an inverse relationship between the exchange rate and economic growth. Especially in developing countries, the input structure of production depends on imported capital and intermediate goods, so an increase in exchange rates makes import production inputs more expensive and thus negatively affects economic growth. Turkey, leaving foreign exchange rate free float since 2002, has implemented the Inflation Targeting (IT) regime as the monetary policy. Therefore, Turkey has a real experience to analyse the role of exchange rate changes on economic growth. Accordingly, in our study, using the quarterly data between 2002-Q1 and 2019-Q1, the relationship between exchange rate and economic growth was examined by employing Johansen cointegration test, Granger causality test and Innovation Accounting Techniques. Empirical findings suggest that there is a negative causal relationship between exchange rates and economic growth, as claimed by structuralist economists. In terms of policy implications, it can be argued that, even under the inflation targeting regime in Turkey, both price and exchange rate stability should be provided together.

Keywords:
cointegration; exchange rate; economic growth; Granger causality; time-series model; vector error correction model
References

Aman, Q., Ullah, I., Khan, M.I. and Khan, S. (2013). Linkages between Exchange Rate and Economic Growth in Pakistan, European Journal of Law and Economics. 44(1), pp. 157-164. https://doi.org/10.1007/s10657-013-9395-y

Bahmani-Oskooee, M., Chomsisengphet, S. and Kandil, M. (2002). Are Devaluations Contractionary in Asia. Journal of Post Keynesian Economics, 25(1), pp. 69-81. https://doi.org/10.1080/01603477.2002.11051349

Bird, G. and Rajan, R. S. (2004). Does Devaluation Lead to Economic Recovery or Economic Contraction? Theory and Policy with Reference to Thailand. Journal of International Development, 16, pp. 141–156. https://doi.org/10.1002/jid.1056

Blecker, R.A. and Razmi, A. (2008). The Fallacy of Composition and Contractionary Devaluations: Output Effects of Real Exchange Rate Shocks in Semi Industrialised Countries. Cambridge Journal of Economics, 32(1), pp. 83–109. https://doi.org/10.1093/cje/bem021

Chen, J. (2012). Real Exchange Rate and Economic Growth: Evidence from Chinese Provincial data. PSE Working Papers, 2012-05, 127.

Cottani, J., Domingo, C. and Shahbaz, M. K. (1990). Real Exchange Rate Behaviour and Economic Performance in LDCs. Economic Development and Cultural Change, 39(1), pp. 61-76. https://doi.org/10.1086/451853

Çelik, T., Çelik B. and Barak, D. (2017). Real Exchange Rate and Economic Growth Relationship in Transition Economies. Suleyman Demirel University, The Journal of Faculty of Economics and Administrative Sciences, 22(3), pp. 877-890.

Di Nino, V., Eichengreen, B. and Sbracia, M. (2011). Real Exchange Rates, Trade, and Growth: Italy 1861– 2011. Banca d’Italia Economic History Working Papers, No. 10. https://doi.org/10.2139/ssrn.2236718

Dickey, D.A. and Fuller W.A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica, 49(4), pp. 1057-1072. https://doi.org/10.2307/1912517

Domaç, İ. (1997). Are Devaluations Contractionary? Evidence from Turkey. Journal of Economic Development, 22(2), pp. 145-163.

Galindo, A., A. Izquierdo and Montero, J. (2005). Real Exchange Rates, Dollarization and Industrial Employment in Latin America. Banco de España Working Paper, No: 0601. https://doi.org/10.2139/ssrn.1820052

Granger, C.W.J. (1988). Some Recent Developments in a Concept of Causality. Journal of Econometrics, 39(1-2), pp. 199-211. https://doi.org/10.1016/0304-4076(88)90045-0

Habib M. M., Mileva, E. and Stracca, L. (2017). The Real Exchange Rate and Economic Growth: Revisiting the case using External Instruments. Journal of International Money and Finance, 73, pp. 386–398. https://doi.org/10.1016/j.jimonfin.2017.02.014

Hallwood, C. P. and R. Macdonald (2003). International Money and Finance, Blackwell Publishing. ISBN: 0-631-20461-X.

Johansen, S. and Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration with Application to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52, pp. 169-210. https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x

Keller, W. (2004). International Technology Diffusion. Journal of Economic Literature, 42, pp. 752-782. https://doi.org/10.1257/0022051042177685

Lee, J.-W. (1995). Capital Goods Imports and Long-run Growth. Journal of Development Economics, 48, pp. 91-110. https://doi.org/10.1016/0304-3878(95)00015-1

Mazumdar, J. (2001). Imported Machinery and Growth in LDCs. Journal of Development Economics, 65, pp. 209–24. https://doi.org/10.1016/S0304-3878(01)00134-1

Missio, F. J., Jayme, G. F., Britto, G. and Oreiro, J. L. (2015). Real Exchange Rate and Economic Growth: New Empirical Evidence. Metroeconomica, 66(4), pp. 686-714. https://doi.org/10.1111/meca.12087

Narayan, P.K. and Narayan, S. (2007). Is Devaluation Expansionary or Contractionary? Empirical Evidence from Fiji. Applied Economics, 39, pp. 2589–2598. https://doi.org/10.1080/00036840600707266

Obansa, S. A. J., Okoroafor, O. K. D., Aluko, O. O. and Millicent Eze (2013). Percieved Relationship between Exchange Rate, Interest Rate and Economic Growth in Nigeria: 1970-2010. American Journal of Humanities and Social Sciences, 1(3), pp. 116-124. https://doi.org/10.11634/232907811301374

Phillips, P.C.B. and Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika, 75, pp. 335–346. https://doi.org/10.1093/biomet/75.2.335

Ribeiro, R. S. M., McCombie, J. S. L. and Lima, G. T. (2019). Does Real Exchange Rate Undervaluation Really Promote Economic Growth? Structural Change and Economic Dynamics, 50, pp. 408-417. https://doi.org/10.1016/j.strueco.2019.02.005

Rodrik, D. (2008). The Real Exchange Rate and Economic Growth. Brookings Papers on Economic Activity, 2, pp. 365-412. https://doi.org/10.1353/eca.0.0020

Tarawalie, A. B. (2010). Real Exchange Rate Behaviour and Economic Growth: Evidence from Sierra Leone. South African Journal of Economic and Management Sciences, 13(1), pp. 8-23. https://doi.org/10.4102/sajems.v13i1.195

Thapa, N. B. (2002). An Econometric Analysis of the Impact of the Real Effective Exchange Rate on Economic Activities in Nepal. Economic Review: Occasional Paper, 14, pp. 1-20.

Vaz, H. P. and Baer, W. (2014). Real Exchange Rate and Manufacturing Growth in Latin America. Latin American Economic Review, 23 (2), pp. 1-17. https://doi.org/10.1007/s40503-014-0002-6

Yihesis, Z. (2006). The Effects of Devaluation on Aggregate Output: Empirical Evidence from Africa. International Review of Applied Economics, 20(1), pp. 21–45. https://doi.org/10.1080/02692170500362264

Metrics

19

Crossref logo

0

4648

Views

7822

PDF views

Copyright © 2020 Financial Assets and Investing

PDF