Portfolio Balance Approach to Exchange Rate Determination: Testing a Model by Applying Bilateral Data of Turkey and United States1

Authors : Recep TARI, Mehmet Çağrı GÖZEN

Pages : 423-434

View : 77 | Download : 15

Publication Date : 2018-07-01

Article Type : Research Paper

Abstract :Turkish economy started to be liberated in the beginning of 1980’s and gradually to be a part of global economic and financial system. But as a result of economic articulation of Turkey to the global world, global economic and financial headwinds have affected trade and economy especially via exchange rates. Since Turkey is of ever-growing foreign trade volume with global economic world determination of fluctuations in exchange rates has increased in importance. Due to global integration of financial markets, inflow and outflow of foreign bonds could cause economic agents to change currency composition of foreign assets to reduce the risks arisen from exchange rates. This situation can negatively affect exchange rates by fluctuating them. Aim of this study is to empirically investigate the portfolio balance effect on exchange rates. In this context, different version of Cushman’s model (2007) using monthly bilateral data of Turkey and U.S. covering the period 2006-2016 will be employed and portfolio balance approach to the exchange rates determination will be tested by performing cointegration test allowing for multiple structural breaks.
Keywords : Exchange Rate Determination Approaches, Portfolio Balance, Risk Premium, Maki Cointegration Test

ORIGINAL ARTICLE URL