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Abstract
This paper examines the effects of exchange rate fluctuations on disaggregated data comprising 21 exporting sectors (BEC classification) in Turkey. Building on a theoretical model that decomposes movements in the exchange rate into anticipated and unanticipated components, the empirical investigation traces the effects through demand and supply channels. Anticipated exchange rate appreciation, in line with movements in underlying fundamentals, has significant adverse effects, contracting export growth across many sectors. Random fluctuations in the exchange rate, deviations around steady-state equilibrium, have asymmetric effects on sectoral export growth. The evidence indicates increased contraction of export demand to currency appreciation over time. In contrast, the effect of depreciation in stimulating export growth has lost momentum over time. While exchange rate fluctuations had a positive net effect on export growth before 2003, the net effect is negative for the post-2002 period. The implications are anticipated movement in the exchange rate guides export plans, signaling the importance of managing fundamentals to anchor rational forecasts. Moreover, less variability of the exchange rate is likely to improve sectoral export growth in Turkey over time.
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Notes
1. Exchange rate shocks (misalignments under a fixed-system) develop in response to domestic economic conditions or in response to external vulnerability, e.g. capital mobility or fluctuations in foreign reserves.
2. Similarly, a depreciation of the exchange rate stimulates demand for exports, which triggers capital accumulation to produce tradable goods. The elasticity of supply to cope with the increased demand determines the allocation of the exchange rate shock between output growth and price inflation.
3. There was no Treasury auction in December, 1999.
4. Although tight fiscal policy was targeted in 2002, public expenditures could not be prevented due to elections held at the end of 2002.
5. The later sample period starts in 2003 as a new series of exports, incorporating changes in definitions, was introduced in 2003.
6. The results are available upon request.
7. The results are available upon request.
8. The necessary diagnostic tests are performed for the exchange rate model and the following models. Results are available upon request.
9. Openness is defined as the sum of exports and imports to GDP. If imports are more binding, the exchange rate depreciates in response to a higher degree of openness. In contrast, if exports are more binding, for example in Korea, Japan, and China, openness would lead to an appreciation of the exchange rate.
10. Dummies are introduced based on visual observation of major breaks in the dependent variables. If significant, the estimated models account for these dummies.
11. By including government spending and the money supply, the empirical model isolates the direct effects of changes in the exchange rate from indirect effects attributed to domestic policies.
12. For details, see Kwiatkowski et al. (1992). Non-stationarity indicates that, real export growth follows a random-walk process. Upon first-differencing, the resulting series is stationary, which is the domain of demand and supply shifts, as specified in theory. Shocks to the exchange rate are stationary, by construction, and therefore, are not cointegrated with non-stationary dependent variables, ruling out the need for an error correction term.
13. Given non-stationarity of dependent variables, the empirical models are estimated in first-difference form.
14. Having accounted for the endogeneity of the exchange rate, attempts to include trade shocks in the empirical model proved insignificant. There is no evidence of structural break in the truncated sample periods.
15. This measure captures shifts attributed to the nominal exchange rate and the foreign price of imports in theory.
16. Unanticipated currency appreciation may be the result of unanticipated shock that moves the exchange rate relative to its expected value under a flexible exchange rate system. Alternatively, under a fixed exchange rate system, unanticipated appreciation may be consistent with an overvalued currency compared with agents' expectations that have adjusted downward in view of underlying macroeconomic fundamentals.
17. For related references, see Kandil (Citation2000), Kandil and Mirzaie (Citation2002) and Kandil, Berument and Dincer (Citation2007).
18. A new series of exports, reflecting changes in classification, was introduced in 2003. Therefore, the later sample period starts in 2003.