Are devaluations contractionary? The case of Turkey

Abstract

This article studies the output effects of currency devaluation in Turkey using annual data from 1970 to 2004. An empirical model that incorporates monetary, fiscal and other external variables in addition to exchange rates is developed. Before estimating the model, time-series properties of the data are diagnosed. Two forms of the model, one with real exchange rate and the other with nominal exchange rate and relative price level (foreign-to-domestic price ratio) are estimated. The results suggest that devaluation is contractionary in the short run, expansionary in the medium run and neutral in the long run, and the effects emanate from nominal devaluation and not from the changes in relative price level.