Monetary Approach to Exchange Rate Determination under Flexible Exchange Rate Regime: Empirical Evidence from Turkey

The aim of this paper is to analyze empirically flexible price monetary approach to exchange rate determination in Turkey under flexible exchange rate regime. The cointegration analysis and error correction model is used to test long-run relationship and short-run effects respectively. The cointegration analysis show that there is a long-run relationship between nominal exchange rate, money supply differential and nominal interest rate differential. So, it could be said that flexible price monetary model is valid in the long-run in Turkey under flexible exchange rate regime. The money supply differential positively and nominal interest rate differential negatively affect the nominal exchange rate as expected. In the short-run, nominal interest rates are more responsive to correct long-run disequilibrium of nominal exchange rates. Â Â JEL classification numbers: F31, C12, C32Keywords: Exchange rate determination, flexible exchange rate regime, monetary approach, cointegration analysis, error correction model