Real Exchange Rate Volatility and Sectoral Export Flows Under Intermediate and Flexible Exchange Rate Regimes: Empirical Evidence From Turkey

Abstract

The aim of this paper is to analyze empirically the effects of real exchange rate volatility on sectoral export flows in Turkey under intermediate and flexible exchange rate regimes. The cointegration analysis and error correction models are used to test long-run relationship and short-run effects respectively. It is expected that the using of sectoral level rather than aggregate data may disentangle the relationship between real exchange rate volatility and export flows. The empirical results show that real exchange rate volatility has negative and statistically significant effects on sectoral exports flows in both intermediate and flexible exchange rate regimes. These empirical results are consistent with the theory. However, the impact of real exchange rate and foreign income appears to be quite different for the two exchange rate regimes. While real exchange rate and foreign income coefficients are positive and significant under intermediate exchange rate regime, they are negatively significant or insignificant under flexible exchange rate regime contrary to the expected. Further research is required to analyse the impacts of real exchange rate and foreign income on sectoral exports. In this respect, one point may be the dependency of a particular sector on import in terms of intermediate goods and the second point may be the competitiveness of Turkey in a particular sector.