Exchange rates and foreign exchange reserves in Turkey: nonlinear and frequency domain causality approach

In this paper aims to investigate the asymmetric relationship between nominal-real exchange rate and foreign exchange reserves of Central Bank in Turkey over the period of 2003:01-2014:01. The study benefits from the recent advance in the nonlinear time series econometric analysis and carries out nonlinear cointegration, causality and frequency domain causality tests. The results find strong evidence of nonlinear cointegration between real exchange rate and Central Bank foreign exchange reserves. Empirical results of both Hansen-Seo (2002) and frequency domain causality analyses imply that there is no relationship from foreign exchange reserves to nominal and real exchange rate, while there is a causal relationship running from nominal and real exchange rate to foreign exchange reserves in Turkey. Diks-Panchenko (2006) non-linear Granger causality test results indicate that there is a causality relationship from foreign exchange reserves to nominal and real exchange rate. By the way of conclusion that Central Bank of Turkish Republic uses the real exchange rate take into account in the context of inflation targeting regime.