Unemployment, Exchange Rate and Exchange Rate Volatility Relation: Analysis for Turkey

Öz By the previous studies, exchange rate fluctuations have been considered to be an important factor affecting the real sector of economies as economies have become more open. Most of the studies focused on its trade impact, however, through different channels, exchange rate movements can also influence the unemployment. This study aims to analyze the effect of exchange rate and its volatility on unemployment for Turkey over the period from 2005 to 2019 by using quarterly data. As a solution for possible endogeneity problem, VAR analysis was performed. Results show that although exchange rate fluctuations do not affect the unemployment, exchange rate volatility significantly increases unemployment. Moreover, positive output shocks contribute statistically significantly to the reduction of unemployment in line with Okun’s Law. In conclusion, different policy measures should be employed to reduce the exchange rate volatility or its effect on unemployment or both.

Anahtar Kelimeler:

Unemployment, Exchange rate, Exchange rate volatility, Turkey, VAR model, Structural breaks

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