Examining Currency Bubbles in Turkish Lira/Us Dollar Exchange Rate

Abstract

Researchers and policymakers have a keen interest in studying the fluctuations of exchange rates over time. These fluctuations can be driven by theoretical factors, referred to as fundamental drivers, or by bubble behavior. Currency crises are frequently triggered by the bursting of currency bubbles, making it essential to investigate the origins of such bubbles and identify their occurrences. This thesis focuses on examining whether any bubble formations existed in US Dollar/Turkish Lira exchange rate between the period of 1990:1 and 2021:11. To this end, we employ the Generalized Supremum Augmented Dickey-Fuller test (GSADF), as proposed by Philips, Shi, and Yu in 2015, on both the nominal exchange rate of TRY/USD and the deviations of the exchange rate from the relative prices of non-tradable and tradable goods, which are considered fundamental factors. The results indicate the presence of multiple explosive behaviors in nominal exchange rates during 1994, 2001, 2003-2009, and 2018. While relative prices of nontradables provide no explanation for the presence of those explosive movements, relative prices of tradables as a fundamental factor seem to explain some periods of the prolonged extreme fluctuations between 2003-2009 and the ones in 1994 and 2018, but not that in 2001. Thus, our findings suggest that only the movements in 2001 and 2006 are the occurrences of rational speculative bubbles in exchange rate of TRY/USD over the periods of 1990:1-2021:11.