Bilgi (10) 2005 / 1 : 27-44 Sources of Exchange Rate Fluctuations With an Application to Turkish Data Hüseyin Taştan ∗ Abstract: Identifying the sources of exchange rate fluctuations is im- portant for both establishing the validity of PPP and achieving success- ful exchange rate stabilization. The decomposition of exchange rate shocks into real and nominal components can be implemented by using a structural vector auto regression (SVAR) model. In this study, the SVAR methodology is employed to identify the sources of exchange rate fluctuations of the Turkish Lira against four currencies, the US Dollar, the British Pound, the Italian Lira and the German Mark for the period covering 1982 January to 1999 December. The variance decom- positions of the forecast error and the structural impulse response functions are calculated to uncover the relative importance of real and monetary shocks in determination of real and nominal exchange rates. The results indicate that real shocks (or supply side shocks) constitute a relatively more important source for the fluctuations of nominal ex- change rates while real shocks significantly dominate monetary shocks for real exchange rates. Keywords: Real Exchange Rates, SUAR Analysis, PPP Hypothesis. Introduction One of the most controversial issues in international finance is the appro- priate modelling of real and nominal exchange rates. The behaviour of real ∗ Dr. H. Taştan, Yıldız Teknik Üniversitesi, İktisat Bölümü