Measuring the Real Exchange Rate Misalignment with Behavioral Equilibrium Exchange Rate Approach: The Case of Turkey

Abstract

In this study the real exchange rate misalignment in Turkey in 1991Q1-2014Q3 period was determined by "Behavioral Equilibrium Exchange Rate Model". The results obtained from the behavioral equilibrium exchange rate model show that the real exchange rate has been misaligned in general throughout the period covered in Turkey and that the size of the current misalignment has reached to 140% in the 1994 crisis and to 195% in the 2001 crisis. And the size of total misalignment has reached to 50% in 1994 crisis and 125% in the 2001 crisis. Another important finding from the study is that the real exchange rate in Turkey is significantly misaligned from both its current and the long-run equilibrium level in the period when the fixed exchange rate regime is applied, and after reaching the flexible exchange rate regime, it converged to its equilibrium level.