Real exchange rate determination and inflation in Turkey 1957-1990
This thesis analyses the determinants of the real exchange rate in Turkey. It is the first major study of the sources of real exchange rate variability in Turkey. This is an important topic because, if the real exchange rate is misaligned, there will be adverse effects upon economic welfare. The theoretical literature on the Marshall-Lerner condition for a successful devaluation is reviewed. The review and the empirical evidence for Turkey, and for other less developed countries, suggests that the Marshall-Lerner condition will not be satisfied. The theory of the determination of the real exchange rate in developing countries is discussed and this theoretical model is applied to the Turkish situation. The results suggest that real variables fail to ensure the competitiveness of the real exchange rate. This reflects the less competitive nature of Turkish tradable goods and causes structural disequilibrium in the foreign exchange market. A major innovation of this thesis is use of the Slutsky equation as an alternative framework to analyse the movements of the real exchange rate. The debate between monetarists and structuralists as to the causes of inflation in less developed countries is discussed and is followed by an empirical analysis of the causes of the Turkish inflation. The evidence reveals the existence of structural causes of inflation. The money supply is not wholly exogenous in Turkey. These findings support the view that restrictive monetary and fiscal policies are not sufficient to improve the competitiveness of the real exchange rate. Policies should also be aimed at increasing the supply capacity of tradable and nontradable products in Turkey.