Foreign exchange reserves and exchange rates in Turkey: Structural breaks, unit roots and cointegration

This paper investigates the relationship between exchange rates (nominal and real) and foreign exchange reserves in Turkey, using monthly data over the period 1982:1-2005:11. Unit root and cointegration tests, which allow for structural breaks are used. The results indicate that there is a long-run relationship between foreign exchange reserves and exchange rates. The results also suggest that the direction of both long and short-run causality is from foreign exchange reserves to real effective exchange rate. As for the relationship between nominal exchange rate and foreign exchange reserves, the results suggest that in the long-run nominal exchange rate Granger cause foreign exchange reserves.