How Geopolitical Risks Influence Real Exchange Rate Dynamics in Türkiye? Evidence from Fourier Cointegration Test with Non-Normal Errors

Abstract

Türkiye is one of the countries that directly and significantly affected by geopolitical risks due to its strategic location. However, the impact of these risks on the real exchange rate—one of the key determinants of macroeconomic stability—remains unclear. This study aims to address this gap in the literature by examining the effects of geopolitical risks on real exchange rate dynamics in Türkiye. In doing so, it also considers essential factors such as terms of trade, real interest rates, and productivity, which are fundamental components of real exchange rate models. The analysis covers quarterly data from 2000:Q1 to 2024:Q1 and employs the newly developed RALS Fourier ADL cointegration test, which offers a robust methodological framework. The findings reveal that geopolitical risks causes to depreciation in Türkiye’s real exchange rate. Specifically, heightened geopolitical risks lead to capital outflows as investors postpone investment decisions, disrupt portfolio investments, and create inflationary pressures. These dynamics result in higher demand for foreign exchange, ultimately driving up the real exchange rate. The study highlights the crucial role of geopolitical risks in modelling Türkiye’s real exchange rate. If policymakers estimate exchange rates without accounting for these risks, their assessments may yield misleading results.