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Determining the Dependency Structure Between Selected Macroeconomic Variables Using the Copula Method

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  • Mervenur Sözen

    (Ondokuz Mayıs University, Department of Statistics,Samsun, Turkiye)

  • Çağlar Sözen

    (Giresun University, Department of Finance and Banking,Giresun. Turkiye)

  • Onur Şeyranlioğlu

    (Giresun University, Department of Business Administration, Giresun, Turkiye)

Abstract

Macroeconomic variables reflect the overall economic situation of a country over a specific period. These variables reflect a country’s expectations and economic activities for the future and have great importance, particularly for a country’s development, strategic planning for the future, and international competitiveness. Because macroeconomic variables are assumed to be interrelated, examining the dependency structure among these variables plays a significant role in shaping countries’ economic roadmaps. The main objective of this research is to model the dependency structure between selected macroeconomic variables using the copula method. The copula method is widely used in the fields of economics and finance due to its strength in characterizing dependency among variables without requiring any assumptions. This study uses data from the Consumer Price Index (CPI), Producer Price Index (PPI), exchange rate (USD/TRY), and interest rate (real interest) between 2007-2022. The pairwise dependency structures among the CPI, PPI, exchange rate, and interest rate variables have been determined using the most appropriate copula model, and the results are then interpreted. According to the analysis results, the Joe copula model was found to best model the dependency between the paired variables of CPI and PPI, of CPI and exchange rates, of PPI and exchange rates, and of PPI and interest rates. The Gaussian copula was identified as the most suitable model for capturing the dependency between CPI and interest rates, while the Frank copula was determined to best model the dependency between exchange rates and interest rates.

Suggested Citation

  • Mervenur Sözen & Çağlar Sözen & Onur Şeyranlioğlu, 2024. "Determining the Dependency Structure Between Selected Macroeconomic Variables Using the Copula Method," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 11(1), pages 20-29, January.
    • Handle: RePEc:ist:iujepr:v:11:y:2024:i:1:p:20-29
    DOI: 10.26650/JEPR1317819
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    References listed on IDEAS

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    1. West, Kenneth D. & Cho, Dongchul, 1995. "The predictive ability of several models of exchange rate volatility," Journal of Econometrics, Elsevier, vol. 69(2), pages 367-391, October.
    2. Trivedi, Pravin K. & Zimmer, David M., 2007. "Copula Modeling: An Introduction for Practitioners," Foundations and Trends(R) in Econometrics, now publishers, vol. 1(1), pages 1-111, April.
    3. Woodford, Michael & WALSH, CARL E., 2005. "Interest And Prices: Foundations Of A Theory Of Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 9(3), pages 462-468, June.
    4. Vandna Jowaheer & Nafeessah Z. B. Ameerudden, 2012. "Modelling the Dependence Structure of MUR/USD and MUR/INR Exchange Rates using Copula," International Journal of Economics and Financial Issues, Econjournals, vol. 2(1), pages 27-32.
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    More about this item

    Keywords

    copula; PPI; CPI; exchange rate; interest rate JEL Classification : E30 ; E31 ; E44;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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