Can Productivity Increases Really Explain the Lira Appreciation: Questions for the Central Bank of the Republic of Turkey

LOPCU K., Burgaç A., Dülger F.

Topics in Middle Eastern and African Economies, vol.14, pp.311-337, 2012 (Peer-Reviewed Journal)


This paper studies the Balassa-Samuelson (B-S) hypothesis between Turkey and 27 members of the European Union (EU-27). The Central Bank of the Republic of Turkey (CBRT) in recent years has emphasized the importance of the B-S hypothesis for Turkey. Specifically, the CBRT states that structural reforms, increased confidence, and macroeconomic stability in the post 2001 era have contributed to the strengthening of the national currency through the relative price differentials between tradable versus non-tradable goods (Inflation Report II, 2006, pp: 31-34). Given this emphasis by the CBRT, we test the cointegrating relationship between the real effective exchange rate, relative productivity, real interest rate differentials and the net foreign asset, using recently developed cointegration techniques with multiple structural breaks. The findings reveal that the relative productivities play a limited role in explaining the real effective exchange rate appreciation. In particular, the relationship between the real effective exchange rate and productivity is not supported for the post 2001 era.

Keywords: Balassa-Samuelson Hypothesis, Real Effective Exchange Rate, Relative Productivity, Cointegration, Multiple Structural Breaks

JEL Codes: C22, E31, F31