Does currency misalignment matter for economic growth? – Evidence from Turkey

Abstract

PurposeThe study mainly aims to examine the currency misalignment of Turkish lira and evaluate if it has an impact on economic growth of Turkey.Design/methodology/approachIt relies on Johansen cointegration technique for measuring currency misalignment relying on single-equation approach and the autoregressive distributed lag (ARDL) approach to evaluate how misalignment affects economic growth. The sample period covers from 1980 to 2016.FindingsThe study identifies that terms of trade, relative productivity differences, net foreign asset, investment and trade openness determine the equilibrium REER of Turkey, and the degree of currency misalignment is observed at a substantial level. The outcome of the ARDL approach suggests that higher currency misalignment reduces economic growth. Turning to the separate impacts of undervaluation and overvaluation, while the former falters economic growth, the later promotes it, a finding contrary to the conventional expectation. Therefore, the use of exchange rate as a policy variable is a critical concern to avoid misalignment for sustained economic growth.Practical implicationsThe anti-growth effect of undervaluation and misalignment is an indication of redistribution of income which could be verified by examining the aggregate consumption behavior of the economy in response to RER movements.Originality/valueThe impacts of currency undervaluation and overvaluation on economic growth of Turkey have been studied in a number of time-series studies. But there is no documented study on the role of currency misalignment on Turkish economic growth. This study is the first that examines how the economic growth of Turkey is influenced by currency misalignment together with the impact of undervaluation and overvaluation.

Nexus Between Real Exchange Rate Misalignment and Economic Growth: A Case of Pakistan

“…The Granger causality showed the non-existence causality between the misalignments of the real exchange rate. The results are similar to some of the studies including Missio et al (2015) , Vieira & MacDonald (2012) and contrasting with (Dani Rodrik, 2009;Mamun et al, 2020;Tarawalie, 2011;Tarawalie, 2021;Tsen Wong, 2013).…”

“…The study found the significant impact of misalignment episodes on economic growth. Mamun et al (2020) explored the effect of real exchange rate misalignment using a single equation approach for Turkey for the period of 1980 to 2016 using the ARDL approach. The results were similar to Dani Rodrik (2009) that is higher the undervalued real exchange rate, the higher the growth with linear relation.…”

Real exchange rate misalignment and economic growth in East African least developed countries

“…However, some recent studies supported neither Rodrik's (2008) nor WCviews. In contrary to the conventional theory, undervaluation falters economic growth of Turkey, while overvaluation promotes it ( Mamun et al., 2021 ). The RER misalignment may have two partially conflicting goals where undervaluation helps output growth by stimulating technological progress and knowledge spillovers, but it harms growth by raising income inequality.…”

Financial development and real exchange rate misalignments effects on environmental pollution

“…LDC economies might benefit from increased real investment and net foreign assets development, but this could be offset by a drop-in growth if RER misalignment, trade liberalization, and government development aid increase CO 2 emissions. Currency misalignment has been shown to hurt financial growth through the ARDL technique (Mamun et al, 2020). With an overvalued RER, LDCs' external competitiveness and financial performance might be improved by effective exchange rate management and consistent macroeconomic policy implementation that impact CO 2 emissions.…”