Time-Varying Relationship Between Exports and Real Exchange Rate in Turkey: A Recent Analysis at Sectoral Level

Previous evidence on the impact of real exchange rate developments on Turkey's exports suggests that the effect is weak while the key determinant of exports is foreign income. Using recent data, this study provides rolling estimates that indicate an increase in the statistical significance and absolute magnitude of the real exchange rate elasticity of exports after the real depreciation of the Turkish lira in recent years. In this context, the cumulative decline in the real exchange rate in recent years is considered one of the factors that boosted Turkish exports. However, the findings confirm that the main determinant of Turkey’s exports is the changes in the incomes of trading partners and real exchange rate movements have a relatively limited effect on exports compared to that of the foreign income. Given that the sectors have quite different structures, the significance of the real exchange rate elasticities and their absolute size differ; yet, the effect of the real exchange rate on exports has increased more recently in most sectors. Finally, while interpreting the findings of the study, it should be taken into account that, in addition to trade channel, real exchange rate movements have effects on the economy through firm and household balance sheet channels.