Asymmetric relationship between interest rates and exchange rates: Evidence from Turkey


KARAMELİKLİ H. , Karimi M. S.

INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, 2020 (SSCI İndekslerine Giren Dergi) identifier identifier

  • Cilt numarası:
  • Basım Tarihi: 2020
  • Doi Numarası: 10.1002/ijfe.2213
  • Dergi Adı: INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS

Özet

This paper deals with the dynamic relationship between the interest rate and exchange rate using the data from the Turkish economy. Macroeconomic variables possess both asymmetric and non-linear features; however, most of the empirical research relating to the dynamics of the exchange rate has been conducted only within a linear framework. Therefore, in this paper, a non-linear autoregressive distributed lag (NARDL) model is used to explore asymmetrical relations in the long-run. The pieces of evidence provided in this article show that an increase in the domestic interest rate has a more robust effect on the exchange rate compared to a decrease of the interest rate. The results further indicate that the impact of the domestic interest rate in the short-run is different from their long-run effects. The linear models which neglect asymmetric relation can yield misleading results by showing no relationship between the two variables in the long-run. This paper shows that there is a robust and stable but asymmetric relationship between the interest rate and exchange rate in the long-run.