exchange rate pass-through to domestic prices in turkish economy a thesis submitted to the ...

75 Pages·2004·0.41 MB·English

EXCHANGE RATE PASS-THROUGH TO DOMESTIC PRICES IN
TURKISH ECONOMY

A THESIS SUBMITTED TO
THE GRADUATE SCHOOL OF SOCIAL SCIENCES
OF
MIDDLE EAST TECHNICAL UNIVERSITY

BY

KORAY ALPER

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE
IN
THE DEPARTMENT OF ECONOMICS

SEPTEMBER 2003
Approval of the Graduate School of Social Sciences

_____________________
Prof. Dr. Bahattin Akşit
Director

I certify that this thesis satisfies all the requirements as a thesis
for the degree of Master of Science.

_____________________
Prof. Dr. Erol Çakmak
Head of Department

This is to certify that we have read this thesis and that in our
opinion it is fully adequate, in scope and quality, as a thesis for
the degree of Master of Science.

_____________________
Assis. Prof. Dr. Esma Gaygısız
Supervisor

Examining Committee Members

Assoc. Prof. Dr. Erdal Özmen _____________________

Dr. Ali Hakan Kara _____________________

Assis. Prof. Dr. Esma Gaygısız _____________________
ABSTRACT

EXCHANGE RATE PASS-THROUGH TO DOMESTIC PRICES IN TURKISH
ECONOMY

Alper, Koray

MS., Department of Economics

Supervisor: Assis. Prof. Dr. Esma Gaygısız

September 2003, 64 pages

In this study, determinants and the evolution of the exchange rate pass-
through to domestic inflation in the Turkish economy is analyzed. The analyses
cover the 1987-2003 period. In the analyses, single equation “Error Correction
Models” are used to estimate the exchange rate pass-through. Estimation results
suggest that alike other emerging countries, the degree of exchange rate pass-
through to domestic prices is high and the pass-through is completed in a very
short time span. Estimations results also indicates that the main factors to account
for high pass-through are the past currency crises and the high degree of openness
of the economy. These factors create the ground for the indexation behavior of
agents. Although, above-mentioned factors are the main determinants of the
degree of exchange rate pass-through, the persistency and the volatility of
exchange rates can significantly affect the short run dynamics of the pass-through.
The results imply that even if the pass-through slows down due to the changing
pattern of exchange rates, to achieve the low and stable inflation in the long run,
fundamental factors that exacerbate the link between exchange rates and prices
should change.

Keywords: Exchange Rate Pass-Through, Inflation
iii
ÖZ

TÜRKİYE EKONOMİSİNDE DÖVİZ KURLARININ FİYATLARA
YANSIMASI

Alper, Koray

Yüksek Lisans, Ekonomi Bölümü

Tez Yöneticisi: Yrd. Doç. Dr. Esma Gaygısız

Eylül 2003, 64 sayfa

Bu çalışmada, Türkiye ekonomisinde döviz kuru değişimlerinin yurt içi
enflasyona yansıma derecesindeki gelişim ve bu ilişkiyi belirleyen etkenler
incelenmiştir. Analizler, 1987-2003 dönemini kapsamaktadır. Analizlerde tek
denklemli “Hata Düzeltme Modelleri” kullanılmaktadır. Tahmin sonuçları, diğer
gelişmekte olan ülkelerde olduğu gibi Türkiye’de de kur değişimlerinin yurtiçi
fiyatlara yansıma derecesinin yüksek olduğunu ve bu sürecin de oldukça hızlı
tamamlandığını göstermektedir. İncelemeler ayrıca, yüksek yansıma derecesine
yol açan temel etkenlerin geçmiş döviz kuru krizleri ve ekonominin yüksek
seviyedeki dışa açıklığı olduğunu göstermektedir. Sayılan etkenler ekonomik
birimlerin endeksleme davranışı için gerekli zemini hazırlamaktadır. Bahsedilen
etkenler kur fiyat ilişkisinin temel belirleyicileri olmakla birlikte kur
değişimlerindeki oynaklık ve kalıcılık unsurlarının da bu ilişkinin kısa dönemdeki
dinamiklerini önemli ölçüde etkileyebildiği bulgulanmıştır. Sonuçlar, kurların
yurtiçi fiyatlara yansıma derecesinin kurdaki hareketlerin niteliğine bağlı olarak
düşebilse de uzun dönemde düşük ve kalıcı bir enflasyonu sağlayabilmek için kur
fiyat ilişkisinin belirleyen temel etkenlerin değişmesi gerektiğini göstermektedir.

Anahtar Kelimeler: Enflasyon , Döviz Kuru, Türkiye
iv
To My Parents and Brother
v
ACKNOWLEDGEMENT

I would like to extend my sincere thanks to Assis. Prof. Dr. Esma Gaygısız
for her supervision and support throughout the preparation of this thesis. I also
would like to thank to the members of my examining community, Assoc. Prof. Dr.
Erdal Özmen and Dr. A. Hakan Kara for their valuable and helpful comments. I
wish to express my appreciation for the support; I received from the Research
Department of Central Bank of the Republic of Turkey. Especially, I would like to
thank to Doğan Karaman, Erdal Yılmaz, Çağrı Sarıkaya, Devrim Yavuz, Kürşat
Kunter, Hande Küçük, Burç Tuger, Tolga Yurttutan, M. Eray Yücel and my
roommates Evren Ceritoğlu and Uğur Çıplak for their valuable helps.

Of course, I am deeply grateful to my wife, Pınar Alper who supported me
during the thesis and shared all the difficulties. It would have been really difficult
to complete this thesis without her.
vi
I hereby declare that all information in this document has been obtained and
presented in accordance with academic rules and ethical conduct, I have fully cited
and referenced all materials and results that are not original to this work.

Date: Signature:
vii
TABLE OF CONTENTS

ABSTRACT …….……………..……………………………………. iii

ÖZ ………………………………………...…………………….…… iv

DEDICATION ………………………………………………………. v

ACKNOWLEDGEMENTS ………………………………….……… vi

TABLE OF CONTENTS ……………………………………….…… viii

LIST OF TABLES ……………….……….………………….……… x

LIST OF FIGURES …………………………………………….…… xi

CHAPTER

1. INTRODUCTION ……………..…………………………….….. 1

2. LITERATURE SURVEY ……………………………………….. 4

2.1. Theoretical Background of Exchange Rate Pass-Through ….. 4

2.2. Theoretical and Empirical Literature on Exchange Rate
Pass-Through ……………………………………………… 7

2.2.1. Exchange Rate Pass-Through in Industrialized
Countries .…………………………………………….. 7

2.2.2. Exchange Rate Pass-Through in Emerging Countries …. 11

3. EMPIRICAL ANALYSES …………..………………………….. 16

3.1. Data ……………………………..………………………….. 17

3.2. A Brief Background …………….………………………….. 19

viii
3.3. Import Price Pass-Through ……..………………………….. 23

3.4. Historical Evolution of ERPT Coefficients …….………….. 28

3.4.1. Methodology ………………………………………….. 28

3.4.2. Estimation Results …………..………………………... 33

3.4.2.1. Estimation Results For Whole Period ….………... 33

3.4.2.2. Recursive Estimates of ERPT ……..…………….. 35

3.5. ERPT Estimations with Recent Data .………..…………….. 43

3.5.1 Main Findings of Estimation Results ...……………….. 44

3.5.2. Simulations of Exchange Rate Pass-Through Process .... 47

3.6. ERPT Coefficients for Some Selected Manufacturing
Sectors ……..……………………………………………….. 51

5. CONCLUSION ………………………………………………….. 54

REFERENCES …………………………...………………………….. 57

APPENDICES ………………………………………………………..

A ESTIMATION RESULTS AND RELATED DIAGNOSTIC
TESTS ………………………………………………………... 61

B. TIME SERIES PLOTS OF THE VARIABLES USED IN THE
ESTIMATIONS ………………………………..…………….. 63

ix
LIST OF TABLES

TABLE

1. ADF Statistics for Testing Unit Root ….……………………….…. 19

2. Imported Input Use of Main Sectors …..……………………….…. 23

3. Cointegration Rank Tests for The Systems ...……………………... 30

4. Tests About the Properties of The Variables in The Systems …….. 31

5. Estimation Results for The Whole Period ....……………………... 34

6. Exchange Rate Volatility in the Sub-Periods of Estimation
Period ….……...…………………………………………………... 38

7. Estimation Results of 1995-2000 and 1995-2003 Periods .……….. 43

8. ERPT in Sectoral Basis ………………..………………………….. 53

9. Detailed Representation and The Diagnostics of 1987-2003 Period
Estimations ………………………………………………………... 61

10. Detailed Representation and The Diagnostics of 1995-2000 and
1995-2003 Periods Estimations …………..……………………... 62

x