PERFORMANCE OF THE TURKISH LIRA DURING THE PERIOD 1994–2025: EXCHANGE RATE THEORIES, VOLATILITY AND REAL EXCHANGE RATE ANALYSIS

Abstract

In this study, the Turkish lira is examined through the theories that explain the value of exchange rates; subsequently, its depreciation and risk against other currencies are identified, and finally, a real exchange rate analysis is conducted. Unlike the existing literature that predominantly relies on econometric modeling, this study adopts an analytical and comparative framework to evaluate the explanatory power of exchange rate theories under real-world conditions. The aim is not to estimate coefficients, but to assess the practical validity and limitations of competing theoretical approaches. The findings show that—even if not clearly for every single year—inflation (the purchasing power parity approach) plays a central role in explaining exchange rate movements in Türkiye. The Balance of Payments or the Monetary Approach is insufficient in explaining the annual changes of the Turkish lira, and it has been determined that the main main explanatory factor of the depreciation of the Turkish lira in the medium and long term is the inflation differential between the United States and Türkiye. Another finding of the study is that the least volatile exchange rate pairs are USD/TRY and EUR/TRY, whereas the most volatile pair is RUB/TRY. The real exchange rate increased until 2007 and then entered a continuous downward trend, remaining for a long period at levels that would encourage exports.