timer Asked: Oct 8th, 2013
account_balance_wallet $30

Question description


My aim is to estimate using VAR, how the currency substitution, exchange rate, real effective exchange rate and interest rate behave. Currency substitution data I achieved by dividing the foreign currency deposits by the M2 definition of money supply. The exchange rate is the USD/Turkish Lira exchange rate, real effective exchange rate I obtained from the Central Bank database and the interest rate is the maximum annual rate paid to turkish lira deposits.
In January 2005, the Turkish Lira was redenominated, by taking off 6 zeros from the currency. So I would like to find out if this has effected the currency substitution growth. I suspect it should have a negative impact since this would increase the confidence in the turkish lira.
I need to find out the impulse responses of currency substitution to changes in the exchange rate, real effective exchange rate and also to deposit rate.
I guess we'd need to take natural logs of all but the interest rate. And introduce a dummy variable for the years from 2005 onwards.

Tutor Answer

School: UIUC

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Outstanding Job!!!!

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