Sector-Specific Effective Exchange Rates and Determinants of Sectoral Exchange Rate Pass-through/Sektöre Özgü Efektif Döviz Kurları ve Sektörel Döviz Kuru Geçişkenliğinin Belirleyicileri

This project was designed for two purposes. The first is to create effective exchange rate indices at the level of manufacturing industry sub-sectors and analyze the characteristics and developments of the indices. The second aim is to determine the sensitivity of sector-level prices to exchange rate movements and the factors that cause exchange rate pass-through to differ between manufacturing industry subsectors. We believe that the project results will provide important input not only in sector-level competitiveness analysis, but also in the impact analysis of industrial policies implemented using tools such as exchange rate and tax/incentive policies. Nominal effective exchange rate is the average of bilateral nominal rates selected according to a certain criterion, obtained using an appropriate weighting method. The real effective exchange rate is the nominal effective exchange rate adjusted for relative price or cost factors between countries. Since they contain information about international price/cost developments, real effective exchange rate indices are considered one of the important indicators used in evaluating a country's competitiveness in international markets. National and international organizations share indicators of countries' effective exchange rates with the public. However, since these indicators are calculated using general manufacturing industry data, they do not reflect differences at the sub-sector level. Considering that sector-specific competition, product diversity and foreign trade partners differ, it is thought that sector-specific exchange rate indices will follow a different course from the indices calculated for the entire manufacturing industry and will be more informative in understanding sectoral competitiveness developments. Recent academic literature draws attention to the importance of sector-specific indices. In this context, Saygılı et al. (2012) created indices for Turkey's 10 manufacturing sub-sectors and showed that the indices differ significantly between sectors. However, the study included a limited number of sectors and the analysis was terminated in 2010. In the first part of this study, Saygılı et al. (2012), effective exchange rate indices are created for manufacturing industry sub-sectors by following the calculation processes implemented by the European Central Bank (ECB) and the Bank for International Settlements (BIS) in method and data selection. Saygılı et al. (2012), the number of sectors covered is increased and the indices are brought up to date. International economic fluctuations affect domestic prices through nominal exchange rates. This concept is defined as exchange rate pass-through in the academic literature. Exchange rate pass-through may vary from sector to sector. The magnitude of this impact depends on various sector-specific factors. Various factors such as foreign trade openness, use of imported intermediates, connections with international production chains, competitive environment of the sector and productivity can affect the exchange rate sensitivity of sector level prices. The findings of the limited number of articles on this subject are that higher integration into global value chains and higher market concentration reduce exchange rate pass-through. In the second part of the study, the roles played by sector-specific indicators in exchange rate pass-through are analyzed using panel data methods. As a contribution to the literature, sector-specific exchange rate indices are included in the analysis.