Exchange Rate Movements and the Sustainability of Long-Run Economic Growth

The Turkish economy has been affected by recurring populist cycles and resultant economic crises, which have, in turn, unfavorably influenced the growth performance of the country. Inspired by the Turkish experience, this study attempts to investigate the effects of changes in exchange rate on the growth performance of the Turkish economy by using the production function framework. The data is sourced from the World Development Indicators and Penn World Table. Modern time series techniques are utilized to estimate the production function. Our findings reveal that there is a long-term but unfavorable relationship between changes in the exchange rate and economic growth in Turkey over the 1980–2019 period. Beyond its macroeconomic implications, the findings highlight that persistent exchange rate instability undermines macroeconomic sustainability by distorting the price mechanism, weakening investment incentives, and reducing long-term productive capacity. In this context, exchange rate stability emerges as a critical prerequisite for achieving sustainable economic growth in emerging economies such as Turkey.