MEASURING EXCHANGE RATE MISALIGNMENT IN TURKEY

Ümit ÖZLALE (Bilkent University)
Erinç YELDAN (Bilkent University)

We propose a new methodology to measure exchange rate misalignment for Turkey, which has already undergone a severe economic crisis. We estimate the real exchange rate within a time varying parameter model, where a return-to-normality assumption about the parameters is assumed.

Contrary to common belief, it is found that, except the initial four months of the stabilization program, the Turkish Lira remained structurally undervalued for most of 2000. Also, we observe a pattern where Lira has been structurally overvalued after the crisis in 1994 until 1998, and has displayed structural undervaluation after then.