Real Exchange Rate Uncertainty and Domestic Investment in Turkey

This study investigates the relationship between real exchange rate uncertainty and domestic investment in Turkey. Although there is no clear consensus in the literature, many theoretical studies have indicated negative effects of uncertainties on domestic investments. This study aims to investigate the relationship between these two variables in the Turkish economy using quarterly data. In this study, the relationship between these two variables are analyzed by using cointegration analysis drawn from a time series data set on total-fixed-investment/GDP ratio and real exchange rate uncertainty spanning through the years 1988 to 2013. In this study, the GARCH(1,1) model is developed in order to analyze the volatility characteristics of Turkey's real exchange rate. An Error Correction Model is developed and used to estimate the coefficient. According to the result of the cointegration analysis, the real exchange rate uncertainty is found to be negative thereby having a significant effect on domestic investment in Turkey. The results support the idea that real exchange rate uncertainty is an important determinant of investment decisions and it does matter for total investment in Turkey.