Geopolitical Risk, The Real Effective Exchange Rate and Industrial Production in Türkiye: Evidence From a Fourier ARDL Approach
Using a Fourier ARDL approach on monthly data from 2014 to 2024, this study finds that both heightened geopolitical risk and real exchange rate appreciation significantly reduce Türkiye's industrial production in the long run, while also revealing a moderate monthly speed of adjustment to equilibrium.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
To understand how a nation's factories keep humming, one must look beyond the walls of the factory floor. In the complex machinery of a modern economy, industrial production is not just a matter of raw materials and workers; it is a barometer of stability. When a country faces the threat of war, political unrest, or sudden shifts in global tensions, the uncertainty can freeze the decisions of business owners, much like a sudden storm might halt a shipping fleet. Similarly, the value of a nation's currency relative to its trading partners acts as a constant current, pushing and pulling the cost of goods. If a currency becomes too strong, it can make a country's exports too expensive for foreign buyers, while if it becomes too weak, the cost of importing necessary parts can skyrocket. For a developing economy like Türkiye, which relies heavily on imported components to build its products, these two forces—geopolitical tension and currency value—are not just background noise; they are critical levers that determine whether factories expand or contract.
A recent study by Murat Aykırı of Kafkas University takes a close, data-driven look at how these specific pressures have shaped Türkiye's industrial output over the last decade. The research focuses on a turbulent period from January 2014 to December 2024, a time that included a failed coup attempt, a severe currency crisis, a global pandemic, and rising regional conflicts. To make sense of this chaotic timeline, the researcher employed a sophisticated statistical approach known as the Fourier ARDL model. In simpler terms, this method allows the analysis to account for smooth, gradual shifts in the economic landscape without needing to pinpoint the exact date of every single disruption. It is a way of listening to the data's rhythm even when the beat is irregular, ensuring that the relationship between risk, currency, and production is measured accurately despite the noise of history.
The study examined monthly data on three key elements: the level of industrial production, a specific index measuring geopolitical risk based on global news coverage, and the real effective exchange rate, which reflects the true value of the Turkish lira against a basket of other currencies. The analysis revealed a clear and consistent story: both rising geopolitical risk and a strengthening currency have a negative impact on industrial production. When the geopolitical risk index rises by one percent, industrial production drops by approximately 0.15 percent in the long run. This happens because uncertainty causes companies to delay investment, raises the cost of borrowing money, and disrupts the supply chains that Türkiye depends on for its raw materials and energy.
Perhaps even more significant is the finding regarding the currency. The study found that when the real effective exchange rate increases by one percent—meaning the Turkish lira is appreciating or becoming stronger relative to its trading partners—industrial production falls by about 0.57 percent. This result challenges the intuitive notion that a stronger currency is always good for an economy. In a country where factories rely heavily on imported intermediate goods, a stronger currency does lower the cost of those imports, but the study suggests that the damage to export competitiveness outweighs that benefit. As the currency strengthens, Turkish goods become more expensive for foreign buyers, leading to a drop in demand that ultimately shrinks the industrial sector. The data shows that while there are short-term fluctuations where the effects might bounce back and forth, the long-term trend is clear: a stronger lira and higher geopolitical tension both act as brakes on industrial growth.
The research also measured how quickly the economy adjusts to these shocks. The analysis indicates that when a disturbance occurs, the system corrects itself by about 19.2 percent each month as it moves back toward a long-term balance. This suggests that while the economy is resilient and does not stay in a state of imbalance forever, the recovery is a gradual process rather than an immediate snap-back. The study confirms that these relationships hold true even when accounting for the major structural changes of the past decade, such as the pandemic and the 2018 currency crisis. The findings were further validated using a different statistical technique that confirmed the negative link between these external risks and industrial output.
For policymakers, these results offer a roadmap for building a more resilient industrial sector. The study suggests that to protect manufacturing, Türkiye must diversify its supply chains so that it is not overly dependent on a single source for critical inputs or energy. It also points to the need for a stable and predictable exchange rate, warning against excessive appreciation that could hurt exporters. Furthermore, the research highlights the importance of helping industrial firms manage financial risks, perhaps by making it easier for them to hedge against currency swings or access long-term financing. Ultimately, the paper concludes that sustainable industrial growth in Türkiye cannot be achieved by looking at domestic demand alone; it requires a strategy that actively manages exposure to global tensions and maintains a competitive position in the global market.
Drowning in papers in your field?
Get daily digests of the most novel papers matching your research keywords — with technical summaries, in your language.