Exports, real exchange rates and dollarization: empirical evidence from Turkish manufacturing firms

Abstract

We attempt to uncover the relationship between the real exchange rates and exports shares of manufacturing firms in Turkey by taking into account FX exposures and various firm characteristics. We use a large panel of manufacturing firms to carry out an empirical analysis for the period 2002–2010. Contrary to macro-evidence, firm-level empirical evidence suggests that a depreciation of the Turkish lira seems to favor the external competitiveness of firms in general. We document that a real depreciation of the Turkish lira has a positive impact on export shares and its impact is muted to some extent for firms operating in sectors that use imported inputs intensively. In addition, we estimate that export shares increase as a result of real depreciation for firms having low (naturally hedged) and moderate FX debt-to-export ratios. We do not confirm a strong balance sheet channel where a depreciation of the currency may harm firms’ export performance due to currency mismatch. On the contrary, FX borrowing is estimated to support export performance probably due to undermining finance constraints.

Appendix

We followed Goldberg (2004) to calculate industry-specific real exchange rate measures based on pre-period weights (1996–1999). In this framework, we constructed industry-specific exchange rates by using the trade weights of each industry’s trading partners in exports and corresponding bilateral real exchange rates normalized using 2005 as the base year. The export-weighted industry-specific real exchange rate (based on pre-period, $t_{1}-t_{2}$, weights) was calculated as:

$$\begin{aligned} rer_{jt}=\sum _{k=1}^{30} w_{jk}^ {t_{1}-t_{2}}rer_{kt} \end{aligned}$$

where

$$\begin{aligned} w_{jk}^ {t_{1}-t_{2}}=\frac{1}{t_{2}-t_{1}+1} \times \sum _{t=t_{1}}^{t_{2}} \frac{X_{jkt}}{\sum _{k=1}^{n} X_{jkt}} \end{aligned}$$

j represents industry, k represents trading partner, and t represents time. For pre-period weights $t_{1}$ stands for the year 1996 and $t_{2}$ stands for the year 1999. $rer_{kt}$ is the bilateral real exchange rate of trading partner k at the time t. $w_{jkt}$ is the corresponding weight based on the export value, $X_{jkt}$ of the trading partner k in sector j. Due to the lack of consistency in the data available, we dropped several countries. Consequently, across the two-digit manufacturing industries, the number of trading partners varied between 27 and 30, constituting 75–90% of total exports depending on the industry.