Do macroeconomic fundamentals affect exchange market pressure? Evidence from bounds testing approach for Turkey

Abstract

This article investigates the relationship between Exchange Market Pressure (EMP) and macroeconomic fundamentals in Turkey using the Autoregressive Distributed Lag (ARDL) bounds testing procedure and Vector Error Correction Model (VECM) within the framework of the canonical currency crisis models. The results of the bounds tests suggest the existence of a level relationship between EMP and the selected macroeconomic fundamentals. The results of the VECM also suggest that there exists a unidirectional causation that runs from those macroeconomic fundamentals to EMP in the case of the Turkish Economy.

Notes

¹For the sake of consistency, we consider Deutsche mark for the whole period under study and use the official fixed parity (1 Euro = 1.95583 Deutsche mark) to recalculate Turkish lira/Deutsche Mark exchange rate for the period 1999:01 to 2001:02.

²Three-month deposit rate has been used as a proxy for short-term interest rates for Turkey as 3-month T-Bill rates are not available for Turkey.

³For detailed information, please refer to Pesaran et al. (2001), pp. 295–6.