YÖNET M VE EKONOM Y l:2005 Cilt:12 Say :1 Celal Bayar Üniversitesi..B.F. MAN SA

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1 YÖNET M VE EKONOM Y l:2005 Cl:12 Say :1 Celal Bayar Ünverses..B.F. MAN SA Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey Dr. Kemal TÜRKCAN Osmangaz Ünverses, BF, ksa Bölümü, ESK ÖZET Mevcu küreselle me sürecnn en öneml özellklernden br ürem sürecnn parçalanmas d r. Son zamanlarda ula m ve haberle me eknololernde oraya ç kan gel meler ara mal carende öneml ar lara yol açm r. Buna kar n, ara mallar hala ndak dövz kuru yans mas hakk nda yap lan amprk çal malar az say dad r. Bu çal mada hala brm de erler kullan larak, ülke ve endüsr sevyesnde Türkye nn nha ve ara mal hala fyalar n n dövz kuru yans mas 1989.q1 ve 1996.q4 dönem çn ncelenm r. nceleme sonucunda, Türkye dek dövz kuru yans mas n n bu dönemde oldukça h zl oldu u gözlemlenmekedr. Nha ve ara mallar n k sa ve uzun dönem esneklkler dövz kuru yans mas n n hem ülke hem de endüsr sevyesnde am oldu unu gösermekedr. Ek olarak, ahmn edlen yans ma esneklklernn ülkeler ve endüsrler aras nda de kenlk göserd anla lmakad r. Son olarak da, ara mallardak dövz kuru yans mas nha mallara oranla göre daha yüksek oldu u sonucuna ula lm r. Anahar Kelmeler: Dövz Yans mas, Nha Mallar, Ara Mallar, Türkye EH R Nha ve Ara Mallarda Dövz Kuru Yansma Esneklkler : Türkye Örne ABSTRACT A dsncve feaure of presen globalzaon s fragmenaon of producon. The recen developmens n ransporaon and communcaon echnologes led o a surge n nermedae goods rade. However, nermedae goods rade s ofen negleced n he emprcal sudes of he exchange rae pass-hrough. Usng mpor un values, hs sudy examnes he pass-hrough of exchange rae changes no boh aggregaed and dsaggregaed mpored fnal and nermedae goods prces of Turkey for he perod of 1989.q1 o 1996.q4. Emprcally, Turkey's pass-hrough s que rapd. The shor-run and long-run elasces for boh fnal and nermedae goods sugges ha complee pass-hrough s more relevan for Turkey a boh aggregaed and dsaggregaed level. In addon, he esmaed pass-hrough elasces consderably vary across counres and ndusres. Fnally, nermedae goods have relavely hgher pass-hrough raes han fnal goods. Key Words: Exchange Rae Pass-Through, Fnal Goods, Inermedae Goods, Turkey. I. INTRODUCTION As he Breon Woods sysem of fxed exchange raes began o show sgns of sran n he lae 1960s, many ndusralzed counres adoped floang exchange raes early n Snce he breakdown of he Breon Woods sysem, exchange raes flucuaed sharply n boh developed and developng counres. In he absence of changes n real economy, such as changes n producvy growh or labor coss, one mgh expec ha any changes n exchange raes should be fully ransmed no mpor prces of raded goods. Ye has been recorded ha mpor prces have no fully refleced movemens n he exchange rae, a phenomenon ofen labeled as ncomplee pass-hrough of exchange raes no mpor prces.

2 K. Türkcan/ Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey Exchange rae pass-hrough (ERPT) s defned as he percenage change n local currency mpor prces resulng from a one percen change n he exchange rae beween he exporng and mporng counry. The ncomplee passhrough occurs whenever he foregn frms dd no compleely adus her prces o he changes n exchange raes n order o manan her marke shares n he local markes. In he leraure, he phenomenon of foregn frms sablzng her mpor prces n he local currency s defned as prcng-o-marke (PTM) by Krugman (1986). If he foregn frms can decde o se her prce n he buyers' currency o manan her marke shares, hen hs specfc varey of PTM s labeled as local-currency prce sably (LCPS). On he oher hand, f he foregn frms can decde o se her prce n her own currency (.e., pass-hrough s onefor-one), hen hs phenomenon s called as producer currency prcng (PCP). Snce he collapse of he Breon Woods sysem, numerous sudes have analyzed he relaonshp beween he exchange rae movemens and prces of mpored goods and domesc goods, commonly known as ERPT. These sudes can be dvded no hree groups. The frs group focuses on he pass-hrough no aggregae mpor prces (for example, Campa and Goldberg (2002), Parsley (2003), and Campa and Mnguez (2002)). The second group of sudes focuses on he pass-hrough no mpor prces of specfc ndusry or producs. These nclude Kneer (1993), Menon (1993), Feensra, e al. (1996), Sanley and Sollery (1998, 2001), Yang (1997), Olve (2002), and Pollard and Coughln (2003). The las group s he sudes ha analyze he effecs of exchange rae flucuaons on he domesc prces, specfcally Consumer Prce Index (CPI) and Wholesale Prce Index (WPI) (for example, Legh and Ross (2002)). To he bes of our knowledge, wh he excepon of Ahukorala and Menon (1994), Campa and Goldberg (1995), and Campa and Mnquez (2002), nermedae goods rade s ofen negleced n he boh heorecal and emprcal sudes of he ERPT no mpor and domesc prces. A dsncve feaure of presen economc globalzaon s produc fragmenaon or ousourcng. As he World markes have become ncreasngly negraed n he las few decades due o developmens n ransporaon and communcaon echnologes, fragmenaon of producon occurs no only across regons whn a counry bu also across counres. Overall, hese advances ulmaely led o a surge n he nermedae goods rade. 1 Emprcal resuls n Ahukorala and Menon (1994) sugges ha npu coss sgnfcanly deermne he degree of pass-hrough and PTM for Japanese exporers. In addon, Campa and Goldberg (1995) emprcally show ha npus rade has a sgnfcan effec on he responsveness of frms' nvesmen decsons o exchange rae changes. Usng monhly mpor un values daa and he npuoupu ables, Campa and Mnquez (2002) esmaed he pass-hrough elasces 1 A number of emprcal sudes have recorded he growng mporance of rade n nermedae goods despe he fac ha hese sudes all used dfferen daa sources and mehods o measure he degree of fragmenaon. See Feensra (1998), Campa and Goldberg (1997), Hummels e al., (1998), Yeas (2001), and Türkcan (2003), for example. 62

3 Yönem ve Ekonom 12/1 (2005) o CPI and he coss of nermedae consumpon for 12 European Unon counres (EU) rade wh 12 non-eu counres. Ther emprcal resuls ndcae ha he calculaed pass-hrough elasces for fnal goods consumpon are sgnfcanly lower han ha for nermedae goods consumpon. None of above sudes, however, explcly analyzes he pass-hrough elasces no mpored fnal goods prces and mpored nermedae goods prces. The goal of hs sudy s o compare he ERPT n Turksh mpors of fnal goods wh he ERPT n Turksh mpors of nermedae goods a boh aggregaed and dsaggregaed level. The goal of hs sudy s hen wofold. The frs one s o esmae ERPT no boh aggregaed and dsaggregaed mpored fnal and nermedae goods prces of Turkey. Buldng on he model developed by Campa and Goldberg (2002), shor-run and long-run pass-hrough raes are esmaed usng quarerly daa from 1989 o 1996 for mpored fnal and nermedae goods prces of Turkey s rade wh 12 OECD counres. The second goal of hs sudy s hen o compare he ERPT n Turksh mpors of fnal goods wh he ERPT n Turksh mpors of nermedae goods a boh aggregaed and dsaggregaed level. Followng Campa and Goldberg (2002), he pass-hrough elasces a aggregaed and dsaggregaed level are esmaed usng he Ordnary Leas Squares (OLS) mehod. The res of he paper s organzed as follows. Secon 2 brefly summarzes he model developed by Campa and Goldberg (2002). Secon 3 provdes emprcal framework and he daa. Secon 4 presens and dscusses emprcal resuls. The fnal secon summarzes man conclusons of he sudy. II. THE MODEL Ths sudy follows Campa and Goldberg's (2002) approach, where a markup model was used o esmae pass hrough effecs. We begn by assumng ha here s a represenave foregn frm ha has marke power over he prce of s goods n mporng counres. Furher we assume ha hs represenave frm ses s expor o counry n s own currency margnal cos of producon C : PX as a markup PX C (1) over s where he asersks refer o varables measured n foregn currency. To oban he mpor prce n he mporng currency PM, equaon (1) s mulpled by he local currency prce of foregn exchange, E (.e., defned n erms of domesc currency per uns of foregn currency). Hence, domesc currency mpor prce s gven by: PM PX E E C (2) Markup raes vary f he ERPT s less han complee. Markup raes depend on compeve pressure n he foregn marke, demand pressure n he domesc 63

4 K. Türkcan/ Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey marke Y, and he exchange rae. The dfference beween he prce of mporcompeng producs and he exporer's producon coss provdes a measure of compeve pressure. The demand pressure, on he oher hand, would be capured by he exporng counry's ndusral producon ndex. The exchange rae can be an mporan cos facor n he represenave foregn frm's cos funcon f hs represenave frm heavly reles on he mpored nermedae goods. The prof markup s hus modeled as: E P C Subsung equaon (3) no equaon (2), we oban: PM h E C 1 Y P Takng he logarhms of he varables, and afer some manpulaon we have: pm 1 e 1 c p y (5) In equaon (5), he ERPT s defned as he elascy of foregn currency wh respec o he exchange rae (.e.,1 ). 2 The mpor prce s hus specfed as a funcon of exchange rae e, foregn exporer's margnal cos c, compeve pressure p, and he demand pressure Y (3) (4) y. Pass-hrough s sad o be complee when 0, whereas s ncomplee when s beween 0 and 1. In sum, he model ses ha he elascy of he ERPT s posve and less han one. Moreover, he coeffcens for he exporer's cos varable, he compeve pressure, and he demand pressure are expeced o be posve. III. ECONOMETRIC PROCEDURE AND DATA Before we proceed n he esmaon of equaon (5), we mus assess he problems of saonary of he varables, conegraon, and srucural breaks. To confron hese problems, we frs apply he Augmened Dckey-Fuller (ADF) es o log seres of mpor prces, exchange rae, foregn coss, foregn counry's ndusral producon ndex, and home counry's producer prce ndex. The ADF ess ndcae ha wh a very few excepons logarhmc forms of all me seres wh me rend conan un roos. 3 Afer frs dfferencng, he null hypohess of un roo wh very few excepons s easly been reeced for all seres esed. As a consequence, he frs dfferences of he me seres are used n he regressons. In addon o saonary of he me seres, we employ he Engle- Granger procedure o deermne wheher hese ndvdual me seres are negraed of order one or I 1. Followng Campa and Goldberg (2002), he Engle-Granger procedure nvolves he esmang he followng equaon: 2 From now, we drop he counry ndex for smplcy reason. 3 The resuls of he ADF ess are no repored n hs sudy o save space. 64

5 Yönem ve Ekonom 12/1 (2005) pm e c (6) The frs sep n he Engle-Granger procedure requres he esmaon of equaon (6) by OLS and esng he esmaed resduals 1 for saonary o deermne wheher he regresson equaon mgh represen a conegrang relaonshp beween he varables. The fndngs of he Engle-Granger conegraon es presened n Table 1 ndcae ha wh very few excepons he hypohess of no conegraon can no be reeced. As a resul, an error correcon model (ECM) s no used n he regressons. Furhermore, we mus analyze wheher me seres daa used n hs sudy nclude any perods of volen change. Turkey employed he managed floang regme as he exchange rae sysem n he 1990s. The sample perod ha was covered n our sudy ncludes he volen currency crses n As a resul of Turkey's currency crss, oupu fell 6 percen, nflaon rose o 3-dg levels, he Turksh Cenral Bank los half of s reserves, and he exchange rae (agans he US dollar) deprecaed by more han half n he frs hree monhs followng crss. Hence, s necessary o address hs ssue more carefully. There are several mehods of esng for he presence of srucural breaks n he daa. A ool ha s parcularly useful n hs regard s he Chow es, where dsurbance erm s assumed o be he same n boh perods. To perform Chow es, a number of breakpons, correspondng he perods 1994.q q4, are seleced. Despe he fac ha he sample perod had severe currency crss, he Chow es for all ndvdual me seres s no sgnfcan for all four perods. Thus, he evdence suggess ha splng he me seres no wo perods are no approprae. Table 1: Resuls of Engle-Granger Conegraon Tes Counry Toal Goods Fnal Goods Inermedae Goods ADF Crcal ADF Crcal ADF Crcal Ausra Belgum Swzerland Germany Span France The UK Ialy -5.91* * Japan * Neherlands Sweden USA Noe: The null hypohess s no conegraon. The reecon of null hypohess for ADF es s based on he Macknnon crcal values. * ndcaes he reecon of he null hypohess a 1 % sgnfcance levels. 65

6 K. Türkcan/ Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey For he regressons, followng Campa and Goldberg (2002), we use a log lnear specfcaon for equaon (5): pm 4 0 a e b c c p Pror o esmaon of equaon (7) by OLS, all varables are expressed n frs dfferences and four lags of exchange rae seres are also ncluded n he esmaon o allow mpor prces o respond o any changes n exchange rae over me. 4 The shor-run pass hrough elascy s hus gven by he esmaed coeffcen a, whereas he long-run elasces are provded by Accordng o he model, he shor-run elascy of ERPT, d y (7) 4 0 a. a, s expeced o be posve and less han uny. Moreover, he sgns of b, c, and d are presumed o be posve. The daa used n hs sudy s formed n hree dmensons: one dmenson s he parner counry of Turkey, anoher s he ndusry, and he hrd s me dmenson. The regressons are hemselves composed of wo pars: cross-counry pass-hrough elasces and cross-ndusry pass-hrough elasces. For he esmaon of he ERPT across counres, he daa s aggregaed across ndusres. In oher words, he aggregae analyss (counry by counry) consss of he sum of he ndvdual Inernaonal Sandard Indusry Classfcaon (ISIC) ndusres. As a resul, wo dmensons (counry and me) are used n he esmaon of he ERPT across counres. However, for he esmaon of he ERPT across ndusres, he daa are averaged across counres. Thus, he regresson n hs case does have ndusry and me dmenson. 5 The dependen varable n he regresson s he quarerly mpor un values a he 3-dg level of ISIC of Turksh manufacured mpors from 12 OECD counres. The seres consruced for Turksh mpor un values for Turksh mpors from 12 OECD counres were based on he OECD's Inernaonal Trade Commody Sascs (ITCS) daabase ( ). The daa are classfed by he Harmonzed Sysem (HS) Revson 1. Ths daabase provdes dealed annual blaeral rade daa for commody expors and mpors n quany and value (n housands of $US a curren prces) beween Turkey and s radng parners. There are abou 5403 ems a he 6-dg level of he HS. For hs sudy he op 12 mpor parners were chosen. The purpose of hs s o mnmze he number of mssng observaons consderng he fac ha he consrucng of he mpor values a he 6-dg level of HS requres no only mpor values bu 4 Gven he fac ha he me seres n our sample are quarerly, usng four lags of exchange rae n he esmaon of he equaon (7) s emprcally approprae. 5 The manufacurng ndusres used n hs sudy are shown n Table 7 as ISIC (313, 314, 322, 324, 353, 354, 371, and 372) ndusres were excluded from he esmaons for he sake of mprovng he accuracy of he un-value daa across ndusres. 66

7 Yönem ve Ekonom 12/1 (2005) quany nformaon. 6 As seen n Table 2, roughly 75% of Turkey's manufacured mpors come from hese 12 OECD counres durng he sample perod. In order o analyze wheher he ERPT dffer across fnal goods and nermedae goods, we should frs selec nermedae goods n he blaeral rade daa. Followng Hummels, e al. (1999), we employ he Uned Naons (UN) Broad Economc Caegores classfcaon (BEC) o dsngush nermedae goods from fnal goods. The BEC ncludes 19 basc caegores, whch are lsed n Table 6. Caegores (41 and 521) are classfed as capal goods, caegores (112, 122, 51, 522, and 6) are classfed as consumpon goods, and caegores (111, 121, 2, 3, 42, and 53) are classfed as nermedae goods. The BEC scheme has a maor dsadvanage. Some of he caegores such as food producs (112, 122), fuel goods (321), and capal goods (41, 51) could be consumed drecly by consumers, or used as nermedaes n he relaed ndusry. In hs paper, fuel (3), wll no be consdered as an nermedae good and s omed from he esmaons. The fnal selecon of he nermedae goods hus ncludes he caegores (111, 121, 21, 22, 42, and 53). The fnal selecon of fnal goods ncludes he caegores (112, 122, 51, 522, and 6). In order o selec he nermedae goods from rade daa, we concord from he BEC o Sandard Inernaonal Trade Classfcaon (SITC Rev.3) usng a mappng developed by he UN, and hen mach he SITC o he HS codes usng a correspondence able publshed by he UN. 7 As a resul, abou 2807 ems are seleced ou of 5403 ems from he 6-dg level of HS are consdered as nermedae goods and 1036 ems are consdered as fnal goods. 8 Once, we seleced he nermedae goods and fnal goods, we obaned he un value a he 6-dg produc level of HS producs for each ype of goods. Un values a he 6- dg produc level of HS are consruced as he value of mpors of he produc dvded by he quany mpored. To oban he un values a ndusry level, he calculaed un values are weghed by her value-share n he each ndusry. Indusry, n hs sudy, s defned as he 3-dg Inernaonal Sandard Indusral Classfcaon (ISIC Rev.2). There are 28 manufacurng ndusres a he 3-dg level of aggregaon of ISIC Rev. 2. The weghs n each of ISIC ndusres are hence based on Turkey s mpors n ha ndusry wh he correspondng parner counry. Fnally, he weghed un values are summed over all 6-dg HS 6 These are Ausra, Belgum-Luxembourg, France, Germany, Ialy, Neherlands, Sweden, Swzerland, he Uned Kngdom, he Uned Saes, Japan, and Span. Noe ha Belgum and Luxemburg are reaed as a sngle counry due o daa avalably. 7 The concordances able from SITC Rev.3 o HS (Rev.1) s acqured from he UN publcaon: Sandard Inernaonal Trade Classfcaon Revson 3 Seres M, No.34/Rev.3. The BEC able s obaned from he UN publcaon: Classfcaon by Broad Economc Caegores: defned n erms of SITC Rev.3. Seres M, No.53, Rev.3. 8 The number of nermedaes goods and consumpon goods used n calculaons, however, vares across counres due o mssng quany observaons and rade flows. For nsance, USA has 719 nermedae goods and 1536 consumpon goods whle Germany has 157 and 929, respecvely. 67

8 K. Türkcan/ Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey producs comprsng a parcular ndusry usng a concordance able from HS o ISIC. 9 Snce, he rade daa s recorded annually, we have employed he followng mehod o ransform he un value daa no quarerly daa usng foregn counry s expor prce ndex: where q XUV, MUV MUV (8) MUV, q, q y, from s radng parners, 4 s 1 XUV q, 4 refers o quarerly mpor un value ndex for Turksh mpors MUV, mpors from s radng parner, y refers o annual mpor ndex for Turksh XUV q refers o Turkey s radng parner quarerly expor un value ndex a aggregae level, and refers he 3-dg ISIC (Rev.2). Foregn counry s expor prce ndex a aggregae level s obaned from he Inernaonal Fnancal Sascs (IFS) CD-ROM. The daa s quarerly and s base year s 1995=100. Once, we oban he quarerly blaeral un values a he ndusry level, we have convered hem no Turksh Lra (TL) usng he quarerly blaeral exchange rae beween Turkey and s radng parner. The nomnal exchange rae s defned n erms of domesc currency (TL) per uns of foregn currency. The daa s quarerly and obaned from Cenral Bank of Turkey s web page: For he esmaon of he ERPT across counres, blaeral nomnal exchange raes are used. For he esmaon of he ERPT across ndusres, however, we employed nomnal effecve exchange rae ndex, whch s calculaed as a weghed geomerc average of he exchange raes, expressed n he form of an ndex. Frs, weghs are calculaed n erms of rade share n Turkey s rade wh 12 OECD counres. Then, Turkey s nomnal effecve exchange rae s calculaed as, where 12 E N (9) 1 w E s Turkey s nomnal effecve exchange rae, N s he blaeral exchange rae beween Turkey and s radng parner, and counry n relaon o Turkey. The prces for Turksh subsue goods, w s he wegh of p, and he foregn exporer's margnal coss, c, were proxed by he producer prce ndexes (PPI) and aken from he OECD's Indcaors of Indusral Acvy daabase. Ths ndex s based 9 The concordances able from HS (Rev.1) o ISIC (Rev. 2) s obaned from World Bank Trade and Producon daabase CD-ROM. 68

9 Yönem ve Ekonom 12/1 (2005) on he ISIC (Rev. 2) classfcaon. Daa s quarerly and s base year s 1990=100. The demand pressure, y, was proxed by he foregn ndusral producon ndex (IPI), whch were obaned from he Inernaonal Fnancal Sascs (IFS) CD-ROM. IV. EMPIRICAL RESULTS As saed earler, he pass-hrough of exchange rae changes no mpored fnal and nermedae goods prces are esmaed by OLS for Turksh rade wh 12 OECD counres. Our daa se covers he perod from 1989.q1 o 1996.q4 for 20 Turksh ISIC manufacurng ndusres a he 3-dg level of aggregaon. Before dscussng emprcal resuls, we frs look a Turksh rade daa a boh counry and ndusry level. The rade daa reveal a couple of mporan emprcal facs. Frs, as seen n Table 2, he sgnfcan poron of Turkey's manufacured rade occurred wh 12 OECD counres, abou 75 percen. Germany s he counry wh he larges mpor share n Turkey's oal manufacured goods rade, abou 21 percen. Second, Table 2 ndcaes ha Turkey s nermedae goods rade wh OECD (9) s conssenly lower han Turkey s fnal goods rade wh OECD (9) durng he perod of In addon, Turkey s nermedae goods rade share wh OECD (9) slghly dropped from 70 percen o 69 percen over he perod 1989 o Hence, he degree of fragmenaon has no been ncreased much over hs perod despe he fac ha oher mporan sudes ndcae oherwse. The resuls of he regressons for Turkey's each radng parner and ISIC ndusres for each of he produc groupngs (all mpored manufacured goods, mpored fnal goods, and mpored nermedae goods) are repored n Table 3 and Table 4, respecvely. 10 For he goal of he presen sudy, we wll focus only on he shor-run and long-run pass-hrough elasces for fnal goods and nermedae goods. Begnnng wh he pass-hrough esmaes of he fnal goods, unweghed average pass-hrough across counres s 0.89 per cen n he shor-run whle s 1.18 per cen n he long-run. The average pass-hrough elascy for he nermedae goods s n he shor-run and n he long-run. For he fnal goods, long-run esmaes of he pass-hrough elascy generally end o be hgher han her shor-run counerpars among sascally sgnfcan cases bu one nsance (Span). Also, he resuls show ha counres such as Ialy and Sweden have relavely hgher pass-hrough elasces han oher counres. Turnng now o he nermedae goods, pass-hrough esmaes n he shor-run are generally lower han her long-run counerpars. In addon, Ialy and Ausra have relavely hgher pass-hrough han oher counres. 10 All esmaons are performed n SAS 8.2. Ths sudy focuses on he esmaed value of he shorrun and long-run exchange rae pass-hrough elasces. Hence, he esmaed coeffcens for he oher explanaory varables wll no be repored hough he resuls are n lne wh he heory. 69

10 70 K. Türkcan/ Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey Turnng o our esmaes of pass-hrough for 22 ISIC ndusres repored n Table 4, we fnd ha average shor-run exchange rae pass-hrough elascy s 0.72 for fnal goods and 1.12 for nermedae goods. In he-long-run, we fnd ha average pass-hrough elascy s 0.93 for fnal goods and 1.43 for nermedae goods. Frs of all, he resuls ndcae ha he esmaed pass-hrough elasces consderably vary across ndusres. Ths fndng s clearly n lne wh he resuls of Kneer (1993). In he shor-run, ndusres belongng o ISIC (311, 331, 361, and 342) have relavely hgher pass-hrough no fnal goods han oher ndusres. Indeed, pass-hrough ends o be complee n he shor-run for hese ndusres. On he oher hand, he pass-hrough elasces no fnal goods n ISIC (369, 382, 383, and 384) ndusres are relavely lower han oher ndusres. For fnal goods n he long-run, ISIC (323, 351, 342, and 355) ndusres show hgh pass-hrough elasces whle ISIC (361, 362, 382, 384, and 385) have relavely low pass-hrough elasces. Table 2: The Relave Imporance of Indvdual Counres Impors n he Turkey s Toal Impors from World, All Manufacurng Goods OECD (12) Ausra Belgum Swzerland Germany Span France The UK Ialy Japan Neherlands Sweden USA Fnal Goods OECD (12) Ausra Belgum Swzerland Germany Span France The UK Ialy Japan Neherlands Sweden USA

11 Yönem ve Ekonom 12/1 (2005) Inermedae Goods OECD (12) Ausra Belgum Swzerland Germany Span France The UK Ialy Japan Neherlands Sweden USA Noe: We obaned he oal rade a he 6-dg level of HS produc level for all producs, and hereafer summed over all producs compromsng a parcular ndusry. The economy-wde measure of oal rade for each counry s hen obaned by aggregaon of all ISIC (Rev.2) ndusres. Indvdual counres all manufacures rade s hen dvded by he Turkey s oal rade wh world. Toal rade s defned as sum of expor and mpor values. The process was repeaed for fnal goods and he nermedae goods. Source: Auhor own calculaons from OECD's Daabase ITCS, Harmonzed Sysem (HS), Rev.1, For nermedae goods n he shor-run, ISIC (384, 331, 385, 381, and 382) show relavely hgher pass-hrough whereas ISIC (356, 390, 361, and 369) demonsrae lower pass-hrough. For nermedae goods n he long-run, ISIC (331, 384, 381 and 385) have relavely hgher pass-hrough whereas ISIC (356, 390, and 341) show lower pass-hrough. Also, s worh nong ha conrary o our expecaons, he calculaed pass-hrough raes are found o be negave hough no sgnfcan for some ndusres, such as ISIC (369,382, and 384) for fnal goods and ISIC (356 and 390) for nermedae goods. Table 3: Counry-Specfc Exchange Rae Pass-Through no Impor Prces Counry Toal Goods Fnal Goods Inermedae Goods Shor-Run Long-Run Shor-Run Long-run Shor-Run Long-Run Ausra 1.144* * 1.644* Belgum Swzerland 0.847* 1.066* 0.990* 1.457* 1.278* Germany Span 0.973* 1.195* 1.058* 0.732* 0.905* 1.213* France 0.752* 0.984* * 1.431* The UK * 1.731* Ialy 1.471* * * Japan 0.730* 0.840* 0.860* 1.176* 0.369* Neherlands 1.043* 0.941* * Sweden 1.516* 1.717* 1.687* 2.173* USA 0.664* 1.132* * 1.022* Average Noe: */+: Based on he F-ess (P values) a 5 percen level, can be sascally reeced ha he pass-hrough rae s zero/one. 71

12 K. Türkcan/ Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey Three mporan facs emerge from he cross-counry and cross-ndusry regressons. Frs, emprcal resuls sugges ha he pass-hrough from he exchange rae o mpored fnal and nermedae goods prces n Turkey s que rapd. Pass-hrough across counres or ndusres s relavely complee afer he frs year followng a change n he nomnal exchange. The resuls confrm fndngs by Legh and Ross (2002) ha pass-hrough from he exchange rae o prces n Turkey s over n abou a year, bu mosly n he frs four monhs. Legh and Ross (2002) clam ha he esmaed pass-hrough n Turkey s boh shorer and larger han ha esmaed n oher key emergng marke counres. In ha sudy, a hgh level of currency subsuon and olgopolsc ndusral srucure n Turkey are gven as possble reasons behnd he hgh level ERPT no Turkey's domesc prces. Due o he perssence hgh nflaon, currency subsuon was common n Turkey wh prces, conracs, and wages ndexed formally or nformally o he TL/$ unl he early 2000s. As a resul, frms rapdly pass hrough her own prces due o exchange rae changes. In addon, Turkey's olgopolsc wholesalers are able o pass exchange rae changes rapdly on o realers. Ths has resuled n a sgnfcan ncremen n exchange rae elasces n Turkey. Table 4: Indusry-Specfc Exchange Rae Pass-Through no Impor Prces Indusry Toal Goods Fnal Goods Inermedae Goods Shor-Run Long-Run Shor-Run Long-Run Shor-Run Long-Run * * * * 1.361* * 2.105* 0.881* 2.039* 1.267* * * * * * * 1.215* * * 1.217* 1.221* * 1.013* * 0.870* * * * * * 1.182* * * * * * 3.465* * 2.698* * 1.528* * 1.012* * * * 0.756* * 2.497* Average Noe: */+: Based on he F-ess (P values) a 5 percen level, can be sascally reeced ha he pass-hrough rae s zero/one. 72

13 Yönem ve Ekonom 12/1 (2005) Second, PCP s more relevan for Turkey han LCP for he wo produc groupngs: fnal goods and nermedae goods. Followng Campa and Goldberg (2002), we explore wheher PCP or LCP s relevan for Turkey. Recall ha PCP refers o a null hypohess of zero pass-hrough whle LCP refers o a null hypohess of pass-hrough of uny (complee pass-hrough). Table 5 summarzes he ess resuls across counres and ndusres for all hree dfferen produc groupngs. Begnnng wh fnal goods, we reec zero pass-hrough (LCP) for 6 counres ou of 12 counres n he shor-run whle 5 ou of 12 n he long-run. In he shor-run, pass-hrough elasces no fnal goods are sgnfcanly dfferen from one for 1 ou of 12 counres. In he long-run, we fal o reec complee pass-hrough hypohess for all counres. Turnng now o he nermedae goods n he shor-run, pass-hrough elasces are sgnfcanly dfferen from zero n 8 ou of 12 counres whle we fal o reec complee pass-hrough hypohess for all counres. In he long-run, pass-hrough elasces no nermedae goods are sgnfcanly dfferen from zero n 4 ou of 12 counres whle we fal o reec complee pass-hrough hypohess n 1 ou of 12 counres. The shor-run and long-run elasces for he wo produc groupngs sugges ha PCP (complee pass-hrough) s more relevan for Turkey hough s sll reeced for wo counres. Only for USA and Japan's pass-hrough no Turkey we do fnd evdence ha long-run pass-hrough mgh be less han one. Ahukorala and Menon (1994) found ha ncomplee pass-hrough s beer characerzaon n Japanese expors. In ha sense, he resul s conssen wh Ahukorala and Menon's (1994) fndng. Kneer (1989) found ha counryspecfc adusmen expor prces n conuncon wh exchange rae flucuaons s much more pronounced n he German expor ndusres han n he USA. Gven he fac ha USA's pass-hrough no Turkey s ncomplee for fnal goods, he resuls here are n conras wh Kneer's (1989) fndngs. As evden n Table 5, for fnal goods, a zero shor-run pass-hrough can be reeced for he half of he ISIC ndusres (10 ou of 20) whereas a zero longrun pass-hrough can be reeced n 3 ndusres ou of 20 ndusres. For nermedae goods, a zero shor-run pass-hrough can be reeced for 11 ndusres ou of 20 ndusres whle a zero long-run pass-hrough could be reeced n 6 ndusres ou of 20 ndusres. In he shor-run and long-run, a null hypohess of complee pass-hrough (PCP) could no be reeced for any of he ISIC ndusres ncluded n he esmaons for boh produc groupngs. Lkewse across counres, he evdence ndcaes ha complee pass-hrough across ndusres s more relevan for boh fnal goods and nermedae goods. Thrd, as seen n Table 3 and 4, pass-hrough raes o nermedae goods are much hgher han o fnal goods. A possble explanaon behnd hs resul may be based on he heavy relance on mpored nermedaes across all Turksh manufacurng ndusres n domesc producon. Accordng o World Trade Producon Daabase, abou 21 per cen of used nermedaes n he Turksh manufacurng ndusry s mpored. Turksh fnal goods producers can buy he nermedae goods eher from her own domesc producers or hrough 73

14 K. Türkcan/ Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey mporng. The Turksh npus marke s no well developed o sasfy he ncreased demand comng from s own fnal goods producers. Lke many developng counres, Turkey has employed proecons rade polces o encourage s domesc ndusry unl he 1980s. Developng counres ypcally began by proecng fnal sages of ndusry, such as food processng and auomoble assembly. Once he possbles for replacng consumer goods mpors had been exhaused, hese counres urned o proecon of nermedae goods, such as auomoble pars, seel, and perochemcals. As a resul of hese rade polces, fnal goods ndusres were relavely well developed whle he nermedae ndusres were no. Wh he shorage of compeve pressure from he Turksh npu producers, foregn npus producers would, hus, no need o adus her prce n he Turksh npus marke o proec her marke shares. In oher words, he PTM ncenves for foregn nermedae goods producers less pronounced. By conras, he foregn fnal goods exporers are much more wllng o underake prce adusmens n response o a deprecaon of he TL o proec her marke shares gven he fac ha he fnal goods marke are relavely well esablshed n Turkey. As a consequence, he shor-run pass-hrough raes n fnal goods for Turkey are expeced o be less han one. As seen n he Table 4, he esmaes of he ERPT suppor our nuon. Ths resul s clearly n lne wh he fndngs of Campa and Mnguez (2002). Table 5: Reecon of LCP or PCP for Impor Prces Toal Goods Fnal Goods Inermedae Goods Counry Indusry Counry Indusry Counry Indusry Shor-Run Reec= Reec=1 2 1 Average Elascy Long-Run Reec= Reec=1 1 Average Elascy Noe: Toal number of counres and ISIC ndusres used n he esmaons s 12 and 20, respecvely. Enres n able show number of counres and ndusres for whch hypohess s reeced. LCP refers o a null hypohess of zero pass-hrough (Reec=0) whle PCP refers o a complee pass-hrough (Reec=1). We now explore wheher here s a relaonshp beween he hgher rae of pass-hrough n nermedae goods n some ndusres and he percenage of mpored nermedae goods ulzed by an ISIC ndusry. As noed earler, a hgher percenage of mpored nermedae goods ulzed by an ISIC ndusry s 74

15 Yönem ve Ekonom 12/1 (2005) supposed o ndcae a hgher pass-hrough elasces n ha ndusry. The resuls n Table 5 show only weak suppor of hs predcon. Fnally, s worh nong ha he degree of varaon n pass-hrough esmaes across ndusres s relavely hgher han across counres for boh produc groupngs. These resuls sugges ha exchange rae pass-hrough esmaes for counres are more sable han he exchange rae pass-hrough for ISIC ndusres. Ths fndng conradcs he recen fndngs of Campa and Goldberg (2002) where hey found ha pass-hrough raes for dsaggregaed mpor prces are more sable han he ERPT for aggregaed mpor prces. V. CONCLUDING REMARKS Ths sudy has focused on he pass-hrough of exchange rae changes no boh aggregaed and dsaggregaed mpored fnal and nermedae good prces of Turkey. Followng Campa and Goldberg (2002), shor-run and long-run passhrough raes are esmaed usng quarerly daa from 1989 o 1996 for mpored fnal and nermedae goods prces of Turkey s rade wh 12 OECD counres. We have used a hree-dmensonal panel of very dsaggregaed (6-dg HS level) mpor un values from Turkey's op 12 rade parners for he perod of 1989.q1 o 1996q4. Our economerc resuls lead o he followng conclusons. Frs, emprcally, Turkey s mpor pass-hrough s que rapd especally n nermedae goods. For fnal goods, unweghed average pass-hrough across counres s 0.89 per cen n he shor-run whle s 1.18 per cen n he long-run. The average pass-hrough elascy for he nermedae goods s n he shor-run and n he long-run. Second, here s a consderable degree of varaon n pass-hrough across counres. Thrd, PCP s more relevan for Turkey han LCP for he wo produc groupngs: fnal goods and nermedae goods. The shor-run and long-run pass-hrough no aggregaed mpor prces a aggregaed level for he wo produc groupngs sugges ha PCP s more relevan for Turkey hough s sll reeced for wo counres. Fourh, nermedae goods have relavely hgher pass-hrough raes n he shor-run han fnal goods. Turnng o our esmaes of pass-hrough for 22 ISIC ndusres, we fnd ha average shor-run exchange rae pass-hrough elascy s 0.72 and 1.12, for fnal goods and for nermedae goods, respecvely whle average long-run exchange rae pass-hrough elascy s 0.92 and Frs of all, he resuls ndcae ha he esmaed pass-hrough elasces consderably vary across ndusres. Second, pass-hrough raes o nermedae goods are much hgher han hose for fnal goods. Thrd, he evdence ndcaes ha PCP s more relevan for boh fnal goods and nermedae goods. The fndngs n hs paper sugges a number of polcy mplcaons. Esmaes of exchange rae elasces are very hgh for Turkey, ndcang more or less full pass-hrough of exchange rae changes no nflaon. Campa and Goldberg (2002) proved ha here s a srong relaonshp beween volale nflaon and he degree of he for he OECD counres. I s, herefore, necessary for Turkey o reduce nflaon volaly usng gh moneary polces. 75

16 K. Türkcan/ Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey Furhermore, srucural reforms such as n Turksh wholesale ndusres could make dffcul for foregn frms o pass on he prce ncreases resulng from currency deprecaon. As a resul, hese reforms may reduce he negave mpacs of exernal facors on Turksh economy as a whole. REFERENCES Ahukorala, Premachandra, and Jayan Menon (1994), "Prcng o Marke Behavour and Exchange Rae Pass-Through n Japanese Expors", The Economc Journal, 104 (423), Campa, Jose, and Lnda S. Goldberg (1995), Invesmen, Pass-Through and Exchange Raes: A Cross-Counry Comparson, NBER Workng Paper no.5139, June (1997), The Evolvng Exernal Orenaon of Manufacurng Indusres: Evdence from Four Counres, NBER Workng Paper no.5919, February (2002), Exchange Rae Pass-Through no Impor Prces: A Macro or Mcro Phenomenon, Federal Reserve Bank of New York Workng Paper, no.149, Aprl. Campa, Jose, and Jose M. G. Mnguez (2002), Dfferences n Exchange Rae Pass-Through n he Euro Area, Cenre for Economc Polcy Research Workng Paper, no Feensra, Rober C. (1998), Inegraon of Trade and Dsnegraon of Producon n he Global Economy, Journal of Economc Perspecves, 12, Feensra, R. C., Gagnon, J. E., and M. M. Kneer (1996), Marke Share and Exchange Rae Pass- Through n World Auomoble Trade, Journal of Inernaonal Economcs, 40, Harrgan, James (1997), Cross-Counry Comparsons of Indusry Toal Facor Producvy: Theory and Evdence, Federal Reserve Bank of New York, Research Paper, no.9734, November. Hummels, D., Rapopor, D., and Ke-Mu Y (1998), Vercal Specalzaon and he Changng Naure of World Trade, FRBNY Economc Polcy Revew, June, Kneer, Mchael M. (1989), Prce Dscrmnaon by U.S. and German Exporers, The Amercan Economc Revew, 79 (1), (1993), Inernaonal Comparsons of Prcng-o-Marke Behavor, The Amercan Economc Revew, 83 (3), Krugman, Paul. (1986), Prcng o Marke When he Exchange Rae Changes, NBER Workng Paper, no. 1926, May. Legh, Danel, and Marco Ross (2002), Exchange Rae Pass-Through n Turkey IMF Workng Paper, 02/2004, November. Menon, Jayan (1993), Exchange Rae Pass-Through: Ausralan Impors of Moor Vehcles The Inernaonal Economc Journal, 7(3), Menon, Jayan, and Premachandra Ahukorala (1994), Prcng o Marke Behavour and Exchange Rae Pass-Through n Japanese Expors, The Economc Journal, 104, Olve, Govann P. (2002), Exchange Raes and he Prces of Manufacurng Producs Impored no he Uned Saes, New England Economc Revew, Frs Quarer: Parsley, Davd C. (2003), Exchange Rae Pass-Through n a Small Open Economy: Panel Evdence from Hong Kong, Inernaonal Journal of Fnance and Economcs, 8(1), 1-9. Pollard, Parca S., and Cleus C. Coughln (2003), Pass-Through Esmaes and he Choce of an Exchange Rae Index, Federal Reserve Bank of S. Lous Workng Paper, no b, March. Sanley, Kardazs W., and Kenneh R. Sollery (1998), "Deermnans of Domesc and Impor Prces n Canadan Manufacurng Indusres", Emprcal Economcs, 23, (1998), "Exchange Rae Pass-Through and s Deermnans n Canadan Manufacurng Indusres", Canadan Journal of Economcs, 34(3), Türkcan, Kemal (2003), "Deermnans of Inra-Indusry Trade n Inermedae Goods beween he US and OECD Counres", Paper presened a he METU Conference on Economcs VI, Ankara, Turkey, Sepember 8. Yang, Jawen. (1997), Exchange Rae Pass-Through n U.S. Manufacurng Indusres, The Revew of Economcs and Sascs, 79 (1),

17 Yönem ve Ekonom 12/1 (2005) Yeas, Alexander J. (2001), How Bg s Global Producon Sharng? In S. Arnd and H.Kerzkowsk (eds.), Fragmenaon: New Producon Paerns n he World Economy. Oxford Unversy Press, APPENDIX Table 6: Broad Economc Caegores Classfcaon Scheme (BEC,1986) Commody Caegores End-Use Classes 1. Food caegores 11. Prmary 111. Manly for ndusry Inermedae goods 112. Manly for household Consumpon goods consumpon 12. Processed 121. Manly for ndusry Inermedae goods 122. Manly for household Consumpon goods consumpon 2. Indusral supples no elsewhere specfed 21. Prmary Inermedae goods 22. Processed Inermedae goods 3. Fuels and lubrcans 31. Prmary Inermedae goods 32. Processed Inermedae goods 321. Moor Spr Inermedae and consumpon goods 322. Oher Inermedae goods 4. Capal goods (excep ranspor equpmen), and pars and accessores hereof 41. Capal goods (excep ranspor Capal goods equpmen) 42. Pars and accessores Inermedae goods 5. Transpor equpmen and pars and accessores hereof 51. Passenger moor cars Inermedae and consumpon goods 52. Oher 521. Indusral Capal goods 522. Non-ndusral Consumpon goods 53. Pars and accessores Inermedae goods 6. Consumer goods no elsewhere specfed 61. Durable Consumpon goods 62. Sem-durable Consumpon goods 63 Non-durable Consumpon goods 7. Goods no elsewhere specfed Source: he Uned Naons 77

18 K. Türkcan/ Exchange Rae Pass-Through Elasces n Fnal and Inermedae Goods: The Case of Turkey Table 7: Inernaonal Sandard Indusral Classfcaon (ISIC, Revson 2) Code Indusry 311 Manufacure of food producs 313 Manufacure of beverages 314 Manufacure of obacco 321 Manufacure of exles 322 Manufacure of wearng apparel, excep foowear 323 Manufacure of leaher producs 324 Manufacure of foowear, excep rubber or plasc 331 Manufacure of wood producs, excep furnure 332 Manufacure of furnure, excep meal 341 Manufacure of paper and producs 342 Manufacure of prnng and publshng 351 Manufacure of ndusral chemcals 352 Manufacure of oher chemcals 353 Manufacure of peroleum refneres 354 Manufacure of mscellaneous peroleum and coal producs 355 Manufacure of rubber producs 356 Manufacure of plasc producs 361 Manufacure of poery, chna, earhenware 362 Manufacure of glass and producs 369 Manufacure of oher non-meallc mneral producs 371 Manufacure of ron and seel 372 Manufacure of non-ferrous meals 381 Manufacure of fabrcaed meal producs 382 Manufacure of machnery, excep elecrcal 383 Manufacure of machnery, elecrc 384 Manufacure of ranspor equpmen 385 Manufacure of professonal and scenfc equpmen 390 Manufacure of oher manufacured producs 78