THE ANALYSIS OF THE RELATIONSHIP BETWEEN EXCHANGE RATE VOLATILITY AND INFLATION WITH COINTEGRATION AND CAUSALITY TESTS

Abstract

After the 1970s, with the liberalization of trade and thus the liberalization of exchange rates together with financial liberalization, the economies of the country faced the risk of uncertainty created by exchange rate volatility. It is known that the uncertainty created by exchange rate volatility has some effects on macroeconomic variables of the national economy. The purpose of this study is to investigate the existence of long-term and causal relationship between inflation and real exchange rate and inflation and exchange rate volatility by using current data. In this context, Turkey's economy for 2008: Q1-2018Q3 using quarterly data for the period has attempted to reveal this relationship. The findings of the analyzes showed that there is a long-term relationship between inflation rate and real exchange rate. However, there is no long-term relationship between exchange rate volatility and inflation. The results also show that there is a positive causality from inflation to real exchange rate and exchange rate volatility in general; it has also shown that there is a positive causality from real exchange rate to inflation. From exchange rate volatility to inflation, no causality relationship has been established.