Time varying nature of causality between exchange rate and uncertainties

Abstract

It is a well-known fact that economic uncertainties can affect investor and consumer behavior and pose a significant risk to economic performance. However, literature on the macroeconomic uncertainties related to Turkish economy mostly focuses on the exchange rate uncertainty. This study investigates the causal relationship between the local and global uncertainties with the exchange rate in Turkey by applying the time-varying parameter causality test. The period between 2006 and 2020, since when Turkey has started to implement open economy inflation targeting regime, was selected as sample and monthly data were employed. There are two main conclusions that can be summarized from the findings of time-dependent causality tests. Firstly, the causality relationship between inflation and interest rate uncertainty, which are local uncertainties, with the exchange rate, has been stable and explicitly continuing since 2017, when the high and volatile inflation period began. Secondly, it is noteworthy that there is a causal relationship from global uncertainties to the exchange rate especially in the period during the 2008 global crisis and immediately afterwards, where it has not been seen a casuality relationship between the variables in the whole sample. The causality relationship between global uncertainties and the exchange rate is more permanent in terms of real effective exchange rate. © Peter Lang GmbH Internationaler Verlag der Wissenschaften Berlin 2020. All rights reserved.