erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Long-run and Short-run Determinants of the Real Exchange Rate: Estimations by two Cointegration Tecniques

Fuat Erdal (Adnan Menderes University)
David J. Fielding (University of Leicester, UK)
Chris R. Milner (University of Nothingham, UK University)

Abstract  

In this paper, we analyse the behaviour of Turkish real exchange rate (RER) in the long- and short-run between January 1980 and June 1999. Defining the RER in terms of relative prices and using a small open economy model, the fundamental determinants of RER are specified as the wealth of private sector, government expenditures on nontradable goods, terms of trade and openness of the economy. Long-run estimations of this model are carried out by two cointegration approaches: Single-equation dynamic Engle and Granger technique (OLS) and multi-equation Johansen technique (ML). Short-run versions of the model are estimated by means of error correction models. Both techniques give evidence toward the existence of a stable long-term relationship between the variables in question, indicating that real exchange rate is sensitive to changes in monetary, fiscal and trade policies. A further support towards that comes from the error correction models. Estimations of the model by two different techniques produced similar results both in the long-run and short-run. One possible reason might be due to estimation of the Engle-Granger in a dynamic form in which the estimates converge to the true values at a faster rate than the static estimations. It also gives evidence for the robustness of the model used.

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