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Important Research Note for Exporters from BETAM
The Bahçeşehir University Center for Economic and Social Research,BETAM, has published the Research Note titled "Exchange Rate Changes Are Not Reflected in Export Prices", prepared by Dr. Zümrüt İmamoğlu.
EXECUTIVE SUMMARY
In October 2010, before the Central Bank switched to its new monetary policy, the Turkish Lira (TL) had appreciated by 37 percent in real terms compared to the beginning of 2003, according to the producer price-based real exchange rate indicator. The appreciating TL in this period raised concerns, especially for the export sector, bringing the question "Is the TL overvalued?" to the agenda, while the rising foreign trade deficit increased concerns. In the new monetary policy period, the TL lost 20 percent of its value in real terms in just 10 months (October 2010 - August 2011). As of last July, the TL was 26 percent overvalued compared to the beginning of 2003. How much was the 12 percentage point decline in the real exchange rate compared to October 2010, mainly resulting from the change in the nominal exchange rate, reflected in export and import prices?
Our research shows that export prices in Türkiye have a rather rigid structure. According to our calculations based on the foreign trade unit value index released by TÜİK, the depreciation of the TL was almost not reflected in export prices at all. During the period when the TL depreciated, export prices increased faster than domestic producer prices. In other words, our exporters did not use the exchange rate opportunity to lower their prices and gain an advantage in international competition. The reason for this may be short-term price rigidities or firms' expectations that the rise in the exchange rate was temporary.
The existence of price rigidities in exports shows that exchange rate stability is of critical importance for exports in Türkiye. Policymakers' disregard of these rigidities could cause significant problems for the real sector. Reducing the inflation differentials between Türkiye and developed countries will help the Turkish Lira achieve a more stable structure.
You can access the full research note by clicking the link below
http://betam.bahcesehir.edu.
