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Asymmetric impacts of foreign exchange rate on the demand for money in Turkey: new evidence from nonlinear ARDL

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Abstract

Using the nonlinear ARDL bounds test for cointegration, this empirical study explores the long and the short run asymmetric impact of exchange rate shocks on the demand for money in Turkey from 1986:Q1 to 2014:Q4. Two specifications of money demand have been investigated that reveal that demand for money is explained by the scale and opportunity cost variables as well as the foreign exchange rate which accounts for currency substitution. In particular, the nonlinear ARDL model provides strong proof for asymmetry by using the bootstrap test. Our findings suggest that the response of money demand to a negative shock in exchange rate (appreciation) was stronger than its reaction to a positive shock (depreciation). Thus, individuals should expect further appreciation when Turkish lira appreciates. In addition, based on the dominated effect of inflation expectation caused by the currency depreciation, monetary policy makers should achieve more stable exchange rates to anchor price fluctuations. Furthermore, the findings of stable money demand behaviour emphasizes the important role of money to conduct an efficient monetary policy and achieve price stability.

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Notes

  1. Autoregressive Distributed Lags

  2. We also tried to use the Turkish discount rate, but it failed to indicate any significant results, therefore supporting the fact that domestic interest rate has an unimportant role in capturing the opportunity cost of holding money in emerging and developing countries.

  3. We further estimate two models of the nonlinear relationship between real money demand and the foreign interest rate and inflation rate. The empirical results of these models do not support the asymmetric impacts of foreign interest rate and inflation rate on the MDF in Turkey.

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Authors and Affiliations

  1. College of Business and Economics, Qatar University, P.O.Box: 2713, Doha, Qatar

    Mouyad Alsamara & Zouhair Mrabet

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  1. Mouyad Alsamara
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  2. Zouhair Mrabet
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Correspondence to Mouyad Alsamara.

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Alsamara, M., Mrabet, Z. Asymmetric impacts of foreign exchange rate on the demand for money in Turkey: new evidence from nonlinear ARDL. Int Econ Econ Policy 16, 335–356 (2019). https://doi.org/10.1007/s10368-018-0421-y

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