An Econometric Analysis on the Relationship of Economic Liberalization with Real Exchange Rate

Abstract

The volatility in the real exchange rate may have a negative impact on many macroeconomic variables, primarily interest and inflation. The ability of economic managements to prevent such negative effects is directly proportional to their knowledge of the reasons for the volatility in the real exchange rate. When the literature on the subject is examined, mainly the studies on the relationship between openness and economic growth stand out. However, it is seen that there are not many study that dealing with the relationship between openness and the real exchange rate. Based on this, the aim of the study is to contribute to the literature in this sense by analyzing the effects of Turkey's openness on the real exchange rate. In the study using Autoregressive Distributed Lag (ARDL) time series method, quarterly data between 2004Q1-2018Q4 periods are used. The cointegration test result obtained from the study, taking a higher value than the upper value of the critical value of the F statistic shows that there is a long run cointegration relationship between the variables. The obtained results indicate that the coefficient of Turkey's long run financial and trade openness creates different effects on the real exchange rate. In addition, it is seen that the coefficients of both variables are statistically significant.