MARMARA UNIVERSITY
        Department of Economics
PhD Theses:

 

R. Barış TEKİN
Exchange Rate Pass-Through in Prices of Internationally Traded Goods: New Evidence from Turkey
2005
(Supervisor: Nazım Engin)

ABSTRACT

This thesis studies exchange rate pass-through in prices of internationally traded products. We exclusively focus on manufacturing export and import prices of Turkey which provides an academically interesting case as an emerging and highly open economy. More specifically we measure the degree of Exchange rate pass-through in export and import prices of 22 ISIC Rev.3 manufacturing industries. Our use of 2 digit industry or product group data aims at placing the emphasis on industry characteristics of the specific interaction between exchange rates and product prices. In order to provide a somewhat broader view of the phenomenon, we additionally study the behavior of two aggregate price series; namely, total manufacturing sector export (import) prices and total export (import) prices of Turkey.

The major conclusion of this thesis is that exchange rate pass-through effect on both export and import prices of Turkey, depends crucially on industry characteristics. The degree at which changes in the nominal exchange rate are transferred in tradable products changes according to the salient characteristics of the product and the market. For the export prices of Turkey we have found evidence that the pass-through effect is incomplete for most of the price series examined. This finding indicates that Turkish firms adjust their profit mark ups in order to maintain international competitiveness. For a series of product groups such as textiles, ready-to-wear, and metal products, which have a larger share in total exports of Turkey, we have found a complete degree of exchange rate pass-through. We therefore conclude that Turkey has a considerable degree of market power in international markets for these products, reflected in Turkish exportersí ability to fully transfer changes in the exchange rate of the domestic currency in their export prices.

Our study of the behavior of import prices has also revealed important insights into the pricing practices of foreign importers. First and foremost, we have found strong evidence that pass-through effect on import prices is predominantly complete. In all but two of manufacturing import prices considered we have found evidence of a complete degree of exchange rate pass-through. We therefore conclude that from the import prices point of view, Turkey is still a price taker in international markets. In other words, we failed to reject the small country hypothesis of price taking behavior for Turkey.

Lastly, we have further examined the time behavior of the exchange rate pass-through effect for both import and export prices of Turkey. Recently, it has been suggested that the degree of exchange rate pass-through in the developing world has been diminishing mostly as a result of the decreasing rates of inflation. Recursive VAR estimations we have conducted, however, have indicated that the degree of exchange rate pass-through has remained somewhat stable during the time span examined in the thesis. We therefore reject the hypothesis of a decreasing exchange rate pass-through for the case of Turkey.