Application of the flexible prince monetary model to Turkish exchange rate determination over 1980-1985

Abstract

The present study is an application of the flexibleprice monetary model of exchange rate determination to theTurkish exchange rate over the period 1980/I-1985/IV.A brief survey of the history of the flexible and fixedexchange rate systems is given in order to understant howeconomic variables adjust to internal and externaldisturbances. Problems that arise in the two exchange ratesystems are discussed and are refferred to developpingcountries.The regression model contains the following sixvariables (excluding the constant term): Domestic income,and foreign one period lagged domestic foreign income,income, the difference of foreign and domestic money supplyand finally the difference of one period lagged foreign anddomestic money supply. The regression results show thatdomestic and foreign income have great explanatory power inthe estimation of the Turkish exchange rate. In addition, thedifference of one period lagged foreign and domestic moneysupply affect also the exchange rate.