On the asymmetric effects of exchange rate changes on domestic production in Turkey

Abstract

A few studies in the literature have used linear models to assess the impact of changes in the value of lira on Turkish domestic production. They have found no significant long-run effects. In this paper we separate lira appreciations from depreciations and engage in asymmetry analysis. Since the procedure requires using nonlinear models, we rely upon Shin et al.’s (Festschrift in honor of Peter Schmidt: econometric methods and applications. Springer, New York, pp 281–314, 2014) nonlinear ARDL approach and discover that indeed, the effects of changes in the real effective value of lira have asymmetric effects, both in the short run as well as in the long run. Indeed, in the long run we find that both lira depreciation and lira appreciation to have expansionary effects on domestic production in Turkey.