An Evaluation of Real Effective Exchange Rate Forecasting with Arch And Garch Models: The Case of Turkey

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Beykent Üniversitesi

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The globalization emerging in the post-World War II increases the integration of microeconomic players into the international trade and financial system. Hence, exchange rates gain importance for economic decision-making. Moreover, exchange rates affect the trade balance. Following the dismissal of the Bretton Woods agreement in 1973, governments began to implement the flexible exchange rate regime. Thus, reliable exchange rate forecasting has importance for developing countries having structural problems and underdeveloped financial systems. Moreover, reliable exchange rate forecasting is more complicated during the Covid-19 pandemic. In this ecoonomic conditions, the real exchange rate is an important indicator for financial investors to analyze the competitiveness of the country. This study aims at investigating the real effective exchange forecasting in the Covid-19 pandemic (2019M12-2021M08) by comparing the forecast power of ARCH and GARCH models. The analysis findings demonstrate that ARIMA(1,1,3)-GARCH(1,1) model is the best model for forecasting accuracy. According to the findings, the policy-makers and economic agents must decide on the ARIMA(1,1,3)-GARCH(1,1) model for real effective exchange rate forecasting during the Covid-19 pandemic.


Anahtar Kelimeler

Real Exchange Rate Forecasting, ARCH Modelling, GARCH Modelling, Covid-19 Pandemic


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