The Effects of Uncertainties on Exchange Rates in Türkiye: Markov Regime Switching Models

This study examines the effects of economic policy uncertainty (EPU) and the world uncertainty index (WUI) on the exchange rate in Türkiye. Using quarterly data for 2008Q1-2024Q3, the Markov regime-switching model is applied to explain exchange rate dynamics. The study evaluates the effects of EPU and WUI on exchange rates in different periods, and control variables such as interest rates and lagged exchange rate values are added. The analysis reveals that exchange rate fluctuations are significantly related to EPU and WUI. The findings show that both EPU and WUI positively and strongly affect the exchange rates when the exchange rate shows an increasing trend (Regime 0). In particular, WUI creates volatility in exchange rates by making the effects of global uncertainties more apparent. On the other hand, in more stable periods (Regime 1), the effect of these uncertainty indicators weakens, and market conditions exhibit a more resilient structure. As a result, the effects of uncertainties on exchange rates are associated with local and global economic vulnerabilities, and significant findings that can guide policymakers in managing the effects of economic uncertainties are presented.