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 exporters’ 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.
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