Real Effective Exchange Rate Forecasting in Covid-19 Pandemic: Evidence from Turkey

Abstract

The globalization emerging in the post-World War II increases the integration of microeconomic economic players into the international trade and financial system. Hence, exchange rates gain importance for economic decision-making. The dismissal of the Bretton Woods agreement in 1973 caused governments to implement the flexible exchange rate regime. Therefore, 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. 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(1,1,1) - ARCH(2) and ARIMA(1,1,1) - GARCH(2,1) models have a slight difference and are the best models for forecasting accuracy. According to the findings, the policy-makers and microeconomic players must decide on the ARIMA(1,1,1) - GARCH(2,1) model for real effective exchange rate forecasting during the Covid-19 pandemic.