Determinants of Exchange Market Pressure in Turkey: An Econometric Investigation

AbsTrAcT: This paper investigates the hypothesis that there is a causal relation between speculative pressure and real exchange rate overvaluation, banking-sector fragility, and the level of international reserves in Turkey. An autoregressive distributed lag (ARDL) bounds-testing procedure and Granger causality within vector error-correction models (VECM) are applied to the period after the liberalization of capital flows (August 1989–August 2006). The results of the ARDL bounds test support the theory that exchange market pressure is in a long-run equilibrium relation with the three hypothesized variables over the sample period. On the other hand, the results of the short-run and long-run Granger causality tests indicate the existence of Granger causality running from the three variables to exchange market pressure. The findings further suggest that a feedback relation exists between banking-sector fragility and exchange market pressure. KEy words: ARDL bounds test, exchange market pressure, Granger causality. Turkey is one of the emerging market economies that bought into the promises of the International Monetary Fund (IMF)–prompted financial liberalization policies in the 1980s, which have exposed these economies to speculative short-term capital move