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Parallel Currency Markets and the Monetary Exchange Rate Model: A VECM Application to Turkey Over 1987–1998

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  • Evan Warshaw

Abstract

This study takes a novel approach to testing the monetary model of exchange rate determination by allowing for distortions from the underground economy to be reflected via inclusion of the parallel exchange rate. Using a VECM methodology, an augmented model is tested and compared to a traditional flexible-price monetary model for Turkey over 1987–1998. While in-sample results are supportive of both models, out-of-sample analysis favors inclusion of the parallel exchange rate. Furthermore, the augmented model beats a random walk with and without drift over to mid-range forecast horizons. These results highlight the need to consider potential market distortions of exchange rate movements.

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  • Evan Warshaw, 2016. "Parallel Currency Markets and the Monetary Exchange Rate Model: A VECM Application to Turkey Over 1987–1998," Eastern European Economics, Taylor & Francis Journals, vol. 54(6), pages 473-488, November.
    • Handle: RePEc:mes:eaeuec:v:54:y:2016:i:6:p:473-488
    DOI: 10.1080/00128775.2016.1194215
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    References listed on IDEAS

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    1. Christopher J. Neely & Lucio Sarno, 2002. "How well do monetary fundamentals forecast exchange rates?," Review, Federal Reserve Bank of St. Louis, vol. 84(Sep), pages 51-74.
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