EFFECTS OF MONETARY POLICY ON THE EXCHANGE RATE: A LONG-TERM ANALYSIS FOR TURKEY

Abstract

In this study, the long-term effects of money supply and interest rates, which are monetary policy instruments, on the exchange rate.periodic effects have been examined in Turkey. The study consisted of 38 observations between 1980 and 2017.consists of. As a result of the pre-tests, it was decided that the appropriate estimation method was VECM.given. It has been confirmed that the established model is suitable with the diagnostic tests performed after the estimation.According to VECM long-term estimation results (i) there is a positive and significant relationship between the interest rate and the exchange rate.relationship has been found. Accordingly, a 1% increase in interest rates increases the exchange rate by 1.43%.(ii) It has been determined that there is a positive and significant relationship between money supply and exchange rate. money accordinglyA 1% increase in supply increases the exchange rate by 0.78%. These results show that monetary policy has longshows that it has an effect on the exchange rate in the period. The exchange rate itself is fundamentalAlthough it is not a macroeconomic target, it is the transmission mechanism of monetary policy in an open economy.in terms of targets such as level of economic activity, employment, inflation and balance of payments.This is an issue that should be taken into account by the economy management, since it is of great importance.