Exchange Market Pressure and Monetary Policy: The Turkish Case

Abstract

The purpose of this study is to determine the relationship between monetary policy and the exchange market pressure index in Turkey for the 2002–2018 period with monthly data. To obtain the foreign exchange market pressure index, this study uses the model developed by L. Girton and D.E. Roper and is based fundamentally on the monetary approach to exchange rate determination and the balance of payments. The calculated exchange market pressure index is in accordance with the developments lived in financial markets and changes in monetary policy during the period under investigation. As for the relation between exchange market pressure index and monetary policy, a VAR model was set up and a Granger type causality analysis was carried out. According to Granger causality test results, there is a unidirectional causality running from domestic credit expansion to exchange market pressure and from domestic credit expansion to interest rate differential while there is a bidirectional causality between exchange market pressure and interest rate differential. Since increasing exchange market pressure means a depreciation of the Turkish Lira, the estimated VAR model’s results support the view that the Central Bank will increase the interest rate to temper the exchange market pressure.

Foreign Exchange Pressure and Foreign Exchange Intervention in Nigeria: A Review of Literature

“…Siklar and Akca [30] adopted a VAR methodology and the output of the Granger causality test revealed that a unidirectional causal relationship existed between expansion in domestic credit to EMP, while there existed a bidirectional causal dynamic between EMP and interest rate differential in the model estimated. This EMP pattern signifies a devaluation of the Turkish Lira.…”

Analyzing Exchange Market Pressure Dynamics with Markov Regime Switching: The Case of Turkey

“…Katircioglu and Feridun (2011) found a unidirectional causality from domestic credits, international reserves, real money supply, budget, and current account balance to EMP. Siklar and Akca (2020) investigated the relationship between the monetary policy and EMP in Turkey, covering the period from January 2002 to December 2018. They found bidirectional causality between the interest rate differential and EMP and unidirectional causality from domestic credit to EMP.…”

Economic Policy Uncertaity and Exchange Market Pressure: Panel Evidence

“…When PPP does not hold, the effect of nominal exchange rate changes is fully reflected in the real exchange rate changes. This impacts the relative prices of exports and imports, and thereby, the country's competitiveness and export earnings (Gilal, 2011). A negative exchange rate shock causes the collapse of firms and financial institutions, resulting in a loss of output and employment.…”