Time-Varying Sectoral Exchange Rate Pass-through and Its Structural Drivers: The Case of Turkish Manufacturing Industries

Abstract

This study examines how exchange rate pass-through (ERPT) varies across manufacturing sectors and which structural factors account for this heterogeneity over time. As a first step, the study constructs sector-level nominal effective exchange rate indices, generating a unique dataset that allows exchange rate movements to be matched directly to sector-specific trade structures. Using these indices, ERPT is estimated for Turkish manufacturing industries within a heterogeneous panel data framework. To enable systemic cross-sector comparison, a relative pass-through measure is developed that benchmarks each sector's ERPT against the manufacturing sector average. The analysis further explores the role of key structural characteristics-including trade openness, productivity, and global value chain participation-in shaping sectoral ERPT dynamics. The empirical results reveal significant disparities in pass-through across sectors, with persistent differences in sensitivity of exchange rate fluctuations. Structural determinants exhibit asymmetric effects: higher trade openness and deeper productivity tends to dampen ERPT. These findings highlights the importance of sector-specific characteristics for inflation dynamics and offer valuable policy insights for monetary and trade policy design.