The Effects of Real and Nominal Shocks on Real and Nominal Exchange Rates: The Case of Turkey

This paper aims to explain the sources of real exchange rate fluctuations in Turkey. For this purpose, a bivariate SVAR model with the rates of change in the real and in the nominal exchange rates as endogenous variables is specified, and two types of structural shocks are identified as real and nominal shocks in the sprit of two dimensional model of Lastrapes (1992). Using the approach pioneered by Blanchard and Quah (1989), it is assumed that nominal shocks have no permanent effect on the real exchange rate. The results indicate that unlike the previous study of Erlat and Erlat (1998), the contribution of nominal shocks to real exchange rate fluctuations and the contribution of real shocks to nominal exchange rate are not negligible.