EXCHANGE RATE INFLATION RELATION: THE CASE OF TURKEY

Abstract

There are multiple studies on the relationship between inflation and exchange rate. This study empirically examines the relationship between exchange rates and inflation. In the aforementioned study, Johansen Cointegration Test and Grenger causality analysis of causality analysis were used for the long-term relationship. The vector autoregressive model and impulse-response functions were used by analyzing the variables exogenously and independently. According to the results, there is a long-term relationship between inflation and exchange rate and it has been determined that they are cointegrated.

According to the impulse-response functions, the two variables responded positively to each other. In addition, according to the causality analysis, there is statistically significant bilateral causality between the variables