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Measuring the Real Exchange Rate: Annual Series for Turkey

Erlat, Güzin and Arslaner, Ferhat (1997): Measuring the Real Exchange Rate: Annual Series for Turkey. Published in: METU ERC Working Papers in Economics , Vol. 97, No. 10 (September 1997): pp. 1-99.

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First of all, we have to point out that our main focus is on the measurement of the real exchange rate. Depending upon how we measure for the nominal exchange rate, which price indexes we use for foreign and domestic prices, we end up with several real exchange rate series. In this respect, end of period and period averages of the nominal exchange rate are separetaly utilized. As price indexes, the wholesale price index, the consumer price index and the gross domestic deflator are used. In order to yield real effective exchange rate, the bilateral real exchange rates with the major partners are aggregated. Likewise, depending on the weights and alternative formulas used in the aggregation, we end up different real effective exchange rate series. Since there is no consensus among economists as to the measurement and the definition of the real exchange rate, in this study we aim to construct alternative real exchange rate series based on a common annual data set starting from 1949. The earlier studies for Turkey on real exchange rate measures which were made by the state institutions and by individual researchers are compared with our calculations. Finally, according to the alternative calculations of the real exchange rate, we reached five main results. First, even though end of period series reflected the actual dates of major devaluations more accurately, the period average series gave us a more conservative picture of real exchange rate behaviour which may be preferable in practice by providing us with a better safety margin against possible errors. So, we decided to use period-average based series in the remainder of our analysis. Second, we found that the gross domestic product deflator-based series appeared to overstate the fluctuations in the real exchange rate while the wholesale price index-based results were the least volatile. Third, we found that some real effective exchange rate formulas were sensitive to an increase in the number of trading partners while others were not. Fourth, we concluded that no consistent disparity between the results of different formulas were obtained, and conflicts were observed in very few cases. And lastly, we also compared the bilateral and effective rates for selected series, and found that the amount of discrepancies in their results increase as the weight of the bilateral exchange rate component decreases.

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