Misalignment ( 1/73 ) November 2004 Real Exchange Rate Misalignment in Turkey, 1987-2003 Aykut Kibritçioğlu Department of Economics Ankara University,

November 2004 Misalignment (1/73)

Real Exchange Rate Real Exchange Rate Misalignment in Misalignment in

Turkey, 1987-2003Turkey, 1987-2003

Aykut KibritçioğluAykut KibritçioğluDepartment of EconomicsAnkara University, Turkey


Dr. sc. pol. Aykut KibritçioğluAssociate ProfessorDepartment of EconomicsFaculty of Political SciencesAnkara UniversityTR-06590 Cebeci, Ankara, Turkey

Tel.: +90-312-3197720, ext. 340Fax: +90-312-3197736E-mail: [email protected]: http://dialup.ankara.edu.tr/~kibritci/wiiw.html


Research Visit to the ÖNB & WIIW(Vienna, Austria, November 1-15, 2004)

Research Visit to the ÖNB & WIIW(Vienna, Austria, November 1-15, 2004)

“An Analysis of Early Warning Signals of Currency Crises in Turkey, 1986-2004”

“Real Exchange Rate Misalignment in Turkey, 1987-2003”

“An Overview of Macroeconomic Developments in Turkey”(with special reference to the AK-Party Era, 2002-04)

http://dialup.ankara.edu.tr/~kibritci/http://dialup.ankara.edu.tr/~kibritci/wiiw.htmlwiiw.html


Real Exchange Rate MisalignmentReal Exchange Rate Misalignmentin Turkey, 1987-2003in Turkey, 1987-2003

Abstract: Real exchange rate misalignment measures deviations of actual real exchange rate from its long-run, or equilibrium, level. Policy makers and many researchers are interested in predicting and monitoring misalignment in the foreign exchange market, because, in many cases, it is closely related to possible current account problems or impending currency crises. This study mainly aims to discuss the sensitivity of estimation results to the alternative combinations of actual real exchange rate indices and equilibrium definitions, by using quarterly data from 1987 to 2003 for Turkish lira. The 16 measures of misalignment employed in this study show that the differences between these alternative measures vary between 6.5 and 36.5 percent points, which actually is a very strong indication for high sensitivity of the degree of misalignment to the selected combination of the actual and equilibrium real exchange rate indices.

JEL Classification: E31, F31, C22Key Words: Exchange rate determination; purchasing power parity; real exchange rate; misalignment; time series techniques; Turkish economy


The full-text of the study is downloadable as pdf file (in Turkish):http://econpapers.hhs.se/paper/wpawuwpma/0403006.htm

or http://econwpa.wustl.edu/eps/mac/papers/0403/0403006.pdf


Outline of the PresentationOutline of the Presentation Introduction: Motivation and Aims

Real Exchange Rate: Conceptual Classification

Literature Review

Actual Real Exchange Rate (A)

Long-Run Real Exchange Rate (E)

Real Exchange Rate Misalignment (M)

Currency Crises and Misalignment

Concluding Remarks


Introduction:Introduction:Motivation & AimsMotivation & Aims

of the Studyof the Study


In the late 1990s, Turkey was not able to join the global disinflation process observed explicitly...

Global Inflation & Disinflation and Turkey

0.1

1.0

10.0

100.0

1000.0

10000.0

100000.0

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49

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20

01

20

03

MaximumInflation Rate(worldwide)

Turkey

DevelopingCountries

World Average

United States

Austria

Introduction: Motivation & Aims (1)

Annual Consumer Price Inflation(%, log scale)


-5

5

15

25

35

45

55

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monthly

annual

Turkey suffered from high and persistent inflation since more than three decades. But , finally, it’s declining now...

Introduction: Motivation & Aims (2)Consumer Price Inflation (%)



In Turkey, the black-market for foreign exchange disappeared gradually since early 1980s.

Source: CBRT and PCY/WCY; own calculations.

1

10

100

1000

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1000000

10000000

1950

1953

1956

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2004

Black Market Exchange Rate (TL/USD)

Official Exchange Rate (TL/USD)

0.1

0.2

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1980

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Official Exchange Rate to “Black-Market”Exchange Rate

“Black-Market” Exchange Rate = 1.0


Since May 1981, Turkey has a relatively flexible exchange rate system. This gradually removed the black-market for FX in Turkey.

In 2000, the monthly growth rates of nominal exchange rates were pre-determined to gradually disinflate the economy.

0

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-35

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245BMER / OER (left axis) Annual Increases in OER (right axis)



0.00

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98

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“Currency Substitution” in Turkey

FX Deposits to M2


High inflation and low credibility of government policies in the 1990s created a strong currency substitution. But it’s changing now...


Latest monthly data shows that there is a tendency towards “reverse currency substitution” in Turkey, since late 2002.

Introduction: Motivation & Aims (6)Two Indicators of Currency Substitution in Turkey (%)

30

50

70

90

110

130

150

1998

.01

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.04

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.07

1998

.10

1999

.01

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.07

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.10

Selected Events Foreign Exchange Deposits / TL-denominated Deposits (M2Y - M2) / M2


Do the actual nominal exchange rates show “equilibrium” or “long-run” exchange rates, since the “black market” disappeared in Turkey?

If not, why some economic actors sometimes are suggesting that the Turkish lira is “over” or “under”valued against foreign currencies?

What are the reasons for disequilibrium in the FX market, if there is no “black market” for FX?

How can we measure the divergence of actual real exchange rates from long-run levels? Any reliable empirical methodology?

Why do the “black market” exchange rates not necessarily represent the “equilibrium” exchange rates?



T w o -G o od sIn ternal Real

Exchan geRate

T hree-G oo dsIn ternal Real

Exchan geRate

In ternalReal ER

Bilateral

M u ltilateral

PPP-BasedExternal Real ER

M u nd ell-F lem ing -T yp e Real ER

(T erm s-o f-T rade)

ExternalReal ER

A ctua lRea l E R

T im e-In d epen den t(co nstan t)

T im e-Varying(variab le)

PPP-BasedEqu ilib rium RER

F BERERDerived from a

S in g le-Eq uationM o del

F BERERDerived from aM u lti-Equ atio n

M o del

F un dam en tals-BasedEqu ilib rium RER

L ong-RunRea l E R

Real Exchange Rates: Conceptual Classification


How far were real exchange rates diverged from equilibrium levels between 1987 and 2003 in Turkey?

To what extent were the real exchange rates misaligned or appreciated before the 1994 and 2000-2001 currency crises in Turkey?

Is the Turkish lira really overvalued in real terms against foreign currencies as early 2003? If yes, how far?

If there is a remarkable signal of real appreciation, can it cause a new currency crisis in the country?

Which one of the real exchange rate indices that are currently available is more reliable to detect an approaching currency crisis?



Forecasting the future values of the Turkish lira!

Determining any “notional” equilibrium (nominal or real) exchange rates!

Testing whether the PPP rule is valid for the case of Turkey!

Measuring the degree of the nominal real exchange rate misalignment!

Investigating the short-run dynamics of real exchange rates (issues of adjustment speed & symmetry)!

What we will not do in this study are:



M > 0 => TL is depreciated in real termsM = 0 => A is a “realistic” exchange rateM < 0 => TL is appreciated in real terms

Attention: A is an “observable” variable, while E is a “non-observable” one!

A: Actual real exchange rateE: Long-run (Equilibrium) Real Exchange RateM: Degree of Misalignment

M = (A – E) / E



Real Exchange Real Exchange Rates:Rates:

Conceptual ClassificationConceptual Classification


A l t e r n a t i v e A c t u a l R E R s T h e o r e t i c a l D e f i n i t i o n P r o x i e s U s e d F o r D o m e s t i c a n d / o r

F o r e i g n P r i c e s

T w o - G o o d I n t e r n a l R E R f o r T r a d a b l e s a n d N o n t r a d a b l e s ( i . e . , i n t e r n a l T O T )

t h e r e l a t i v e p r i c e o f t r a d e d g o o d s i n t e r m s o f n o n t r a d e d g o o d s

e T N T =

dNTdT PP

dNTfTn PPe

p r i c e i n d e x e s f o r t r a d a b l e s a n d n o n t r a d a b l e s i n t h e h o m e c o u n t r y , o r f o r e i g n W P I a n d d o m e s t i c C P I

I n t e r n a l R E R s

T h r e e - G o o d I n t e r n a l R E R f o r E x p o r t a b l e s , I m p o r t a b l e s a n d N o n t r a d a b l e s

t h e r e l a t i v e p r i c e s o f e x p o r t e d a n d i m p o r t e d g o o d s i n t e r m s o f n o n t r a d e d g o o d s

e X = dNTdX PP

a n d e M =

dNTdMn PPe

p r i c e i n d e x e s f o r e x p o r t a b l e s , i m p o r t a b l e s a n d n o n t r a d a b l e s i n t h e h o m e c o u n t r y


Internal Real Exchange Rates



External Real Exchange RatesA l t e r n a t i v e A c t u a l

R E R s T h e o r e t i c a l D e f i n i t i o n

P r o x i e s U s e d F o r D o m e s t i c a n d / o r

F o r e i g n P r i c e s P P P - B a s e d B i l a t e r a l A c t u a l R E R

t h e r a t i o o f t h e p r i c e o f a r e p r e s e n t a t i v e c o n s u m p t i o n o r p r o d u c t i o n b a s k e t i n a f o r e i g n c o u n t r y t o t h e p r i c e o f a r e p r e s e n t a t i v e b a s k e t i n t h e h o m e c o u n t r y m e a s u r e d i n t h e s a m e c u r r e n c y

e P P P b = e n P f / P d

C P I s f o r t h e h o m e c o u n t r y a n d a s p e c i f i c f o r e i g n c o u n t r y

P P P - B a s e d M u l t i l a t e r a l ( o r E f f e c t i v e ) A c t u a l R E R

t h e r a t i o o f t h e w e i g h t e d a v e r a g e p r i c e o f a r e p r e s e n t a t i v e c o n s u m p t i o n o r p r o d u c t i o n b a s k e t i n s e l e c t e d f o r e i g n c o u n t r i e s t o t h e p r i c e o f a r e p r e s e n t a t i v e b a s k e t i n t h e h o m e c o u n t r y m e a s u r e d i n t h e s a m e c u r r e n c y

e P P P m =

d

m

1i

iwif

ni P)Pe(

w i t h 1wm

1ii

C P I s f o r t h e h o m e c o u n t r y a n d a s e l e c t e d g r o u p o f c o u n t r i e s , s u c h a s m a i n f o r e i g n t r a d e p a r t n e r s ( i = 1 , 2 , 3 , … , m )

M u n d e l l -F l e m i n g o r A g g r e g a t e P r o d u c t i o n C o s t R E R ( i . e . , e x t e r n a l T O T )

t h e r e l a t i v e c o s t o f a l l g o o d s , m e a s u r e d i n a c o m m o n c u r r e n c y , i n t h e h o m e a n d f o r e i g n c o u n t r y * * *

e T O T = e n G D P D f /

G D P D d

= dXdM

n P/Pe

G D P d e f l a t o r s f o r t h e h o m e a n d f o r e i g n c o u n t r y ( o r e x p o r t a n d i m p o r t p r i c e d e f l a t o r s f o r t h e h o m e c o u n t r y , m e a s u r e d i n d o m e s t i c a n d f o r e i g n c u r r e n c i e s , r e s p e c t i v e l y )

E x t e r n a l R E R s

T r a d e d G o o d s R E R

t h e r e l a t i v e c o s t o f t r a d e d g o o d s , m e a s u r e d i n a c o m m o n c u r r e n c y , i n t h e h o m e a n d f o r e i g n c o u n t r y

e T = dTfT

n P/Pe

o u t p u t p r i c e , p r o d u c t i o n c o s t , o r f a c t o r c o s t i n d e x e s f o r t r a d e d g o o d s i n t h e h o m e a n d f o r e i g n c o u n t r y


Literature Review:Literature Review:Equilibrium Exchange Rates Equilibrium Exchange Rates

and the Case of Turkeyand the Case of Turkey


Alternative Approaches to Estimation of E

Selected Studies on Industrial Countries

Selected Studies on Developing

Countries Short Comments

1.1.1. Traditional PPP Tests (Simple OLS procedure)

Frenkel (1981), Hakkio (1984)

Ahlers and Hinkle (1999: 293–313)

1.1. PPP-Based Reduced-Form Approach

1.1.2. New Generation PPP Tests (Cointegration Tests)

Froot and Rogoff (1994), Breuer (1994), MacDonald (1995)

It involves single-equation estimation of E as a function of international relative prices.

1.2.1. Supply-Side Fundamentals-Based Reduced-Form Approach (Balassa-Samuelson Effect)

Canzoneri, Cumby and Diba (1996). Survey: Rogoff (1996)

1.2.2. Demand-Side Fundamentals-Based Reduced-Form Approach (Baumol-Bowen Effect)

De Gregorio, Giovanni and Wolf (1994), De Gregorio and Wolf (1994), Feyzioğlu (1997)

1. Single-Equation Reduced-Form Estimations

1.2. Fundamentals-Based Reduced Form Approach

1.2.3. Combined Fundamentals-Based Reduced-Form Approach

MacDonald (1997)

Traditional Studies: Edwards (1989, 1994), Razin and Collins (1997), Mongardini (1998). Cointegration Studies: Elbadawi (1994), Elbadawi and Soto (1994, 1995), Loayza and Lopez (1997), Baffes et al. (1999).

E is assumed to be a function of some set of fundamentals. The sectoral productivity difference between the domestic tradables and nontradables sectors is a frequently used supply-side fundamental. On the demand-side, many authors usually employ the level of per capita income and government spending as major fundamentals which affect E.

Literature: Estimation Methodologies for E (I)


Alternative Approaches to Estimation of E Selected Studies on

Industrial Countries

Selected Studies on Developing Countries

Short Comments

2.1. The Partial Equilibrium “Trade Equations” Approach

Bayoumi et al. (1994), Isard and Faruqee (1998, IMF’s macroeconomic balance approach), Wren-Lewis and Driver (1999)

Devarajan et al. (1993), Devarajan (1999)

This approach is mainly based on the standard Mundell-Fleming current account specification (for industrial countries).

2.2.1. Williamson’s Fundamental Equilibrium Real Exchange Rate (FEER)

Williamson (1994)

2.2.2. The IMF’s Desired Equilibrium Exchange Rates (DEER)

Bayoumi et al. (1994)

2.2.3. Natural Equilibrium Exchange Rate (NATREX) Approach of Stein and his Associates

Stein (1994), Stein, Allen and associates (1995)

2. Fundamentals-Based Estimation from Structural Econometric Models

2.2. General Equilibrium Approach

2.2.4. Haque-Montiel Approach for Developing Countries

Haque, Lahiri and Montiel (1990), Haque and Montiel (1999)

Williamson’s and Bayoumi’s and others’ approaches are based on normative definitions of the E and they usually use large, fully dynamic structural models to simulate E, while Stein’s and his associates’ approach is based on a positive E definiton within a small medium-term model.

Literature: Estimation Methodologies for E (II)


Literature: A, E and M Related Studies on Turkey (I)

Main Topic of the Studies Selected Studies Data Period and Frequency

Empirical Methodology

Selçuk (1993a) 1987.I–1993.V, monthly

Weighted index calculations

Selçuk (1993b) 1982.I–1992.XII, monthly


Kıpıcı & Kesriyeli (1997)

1987.I–2000.VII, monthly


Estimation of Actual Real Exchange Rates (A)

Erlat & Arslaner (1997a, 1997b)

1953–1995, annual


Agenor, McDermott & Üçer (1997)

1987.I–1995.I, quarterly

Vector autoregression (VAR) Determination or Macroeconomic Effects of A Saygılı, Şahinbeyoğlu

& Özbay (1998) 1987.I–1996.XII, monthly

Weighted index calculations, OLS and market-share analysis

Telatar & Kazdağlı (1998)

1980.X–1993.X, monthly

Cointegration Long-Run Validity of Purchasing-Power-Parity

Sarno (2000) 1980.I–1997.XII, monthly

Unit-root tests and nonlinear modeling techniques


Literature: A, E and M Related Studies on Turkey (II)

Main Topic of the Study Selected Study

Data Period and Frequency

Empirical Methodology

Alper & Sağlam (2000)

1987.I–1999.I, quarterly

Cointegration

Uğur & Vehbi (2002)

1989–2001, quarterly

Cointegration

Özlale & Yeldan (2002)

1994.IV–2001.XII, monthly

Time-varying parameter model and OLS

Doroodian et al. (2002)

1987.I–1997.6, monthly

Long-term regression

Civcir (2003a) 1987.I–2000.XII, monthly

Johansen cointegration test

Estimation of Real Exchange Rate Misalignment (M)

Civcir (2003b) 1987.I–2000.XII, monthly

Cointegration

Üçer et al. (1998)

1989.IV–1997.IV, monthly

Signal approach

Nierhaus (2000)

1979.VI–1996.XII, monthly

Signal approach Misalignment as an Early-Warning Indicator for Currency Crises

Kibritçioğlu (2000)

1985.XII–1999.IX, monthly

Signal approach

Short-Run Dynamics of Misalignment and the Issue of Adjustment Symmetry

Arghyrou et al. (2003)

1986.I–2001.III, quarterly

“Quadratic Logistic Smooth Transition Error Correction Model”


““Actual” Real Actual” Real Exchange Rates:Exchange Rates:Internal & External “A”Internal & External “A”

Indices for TurkeyIndices for Turkey


65

75

85

95

105

115

125

135

145

19

95

q1

19

95

q3

19

96

q1

19

96

q3

19

97

q1

19

97

q3

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98

q1

19

98

q3

19

99

q1

19

99

q3

20

00

q1

20

00

q3

20

01

q1

20

01

q3

20

02

q1

20

02

q3

20

03

q1

20

03

q3

20

04

q1

20

04

q3

1995 = 100

A1 (K&K)

A2 (TNT)

A3 (Reuters)

A4 (SPO)

CBRT-CPI

CBRT-WPI

JPM

Increase: DepreciationDecrease: Appreciation

notincludedin thesampleperiod

Actual Real Exchange Rates (A): Alternatives

1995=100, 1995.I – 2003.III


Correlations Between Different A Indices

Note: The correlation coefficients for two CBRT indices are calculated for the 1995.I-2003.III period, while for all other indices the correlation coefficients are calculated for the 1987.I-2003.III period.

Actual Real Exchange Rates (A): Alternatives

A1 (K&K) A2 (TNT) A3 (Reuters) A4 (SPO) CBRT-CPI CBRT-WPI JPM

A1 (K&K) 1.000A2 (TNT) 0.932 1.000

A3 (Reuters) 0.656 0.595 1.000A4 (SPO) 0.186 0.191 0.782 1.000

CBRT-CPI 0.981 0.895 0.729 0.230 1.000CBRT-WPI 0.832 0.809 0.957 0.613 0.848 1.000

JPM -0.034 0.019 0.593 0.849 0.524 0.764 1.000

1.000.90-.0990.80-0.890.70-0.79


1995=100, 1987.I – 2003.III

Actual Real Exchange Rates (A): Selected A’s

65

75

85

95

105

115

125

135

145

1987

q1

1988

q1

1989

q1

1990

q1

1991

q1

1992

q1

1993

q1

1994

q1

1995

q1

1996

q1

1997

q1

1998

q1

1999

q1

2000

q1

2001

q1

2002

q1

2003

q1

1995 = 100A1 (K&K)

A2 (TNT)A3 (Reuters)

A4 (SPO)

Increase: DepreciationDecrease: Appreciation


A1: Trade-Weighted Real Effective Real Exchange Rate 1995=100; for 8 countries; PT Σ eWPIf , PN CPId ; A1 =

PT/PN . Source: SIS, CBRT and IMF’s IFS; authors’ calculations.

A2: Internal (TNT) Real Exchange Rate Index1995=100; derived by using implicit price deflators calculatedfrom GDP accounts: PT ( Px+ Pm) and PN Py-x+m ;A2 = PT / PN .Source: SIS and CBRT; authors’ calculations; deseasonalized.

A3: Reuters’ TRTWIN IndexJune 1999 = 100; for four countries; trade-weighted.Source: Reuters; the inverse of the original index; base year adjusted as 1995=100.

A4: SPO’s Real Effective Real Exchange Rate IndexJan. 1982 = 100; USD: 75% & Euro: 25%; for USA & Euro areaPPI and for Turkey WPI.Source: SPO; the inverse of the original index; base year adjusted as 1995=100.

Actual Real Exchange Rates (A): Properties


““Equilibrium” or “Long-Equilibrium” or “Long-Run”Run”

Real Exchange Real Exchange Rates:Rates:

Alternative “E” Indices for Alternative “E” Indices for TurkeyTurkey


Internal balance implies that markets for labor and non-tradable goods are “cleared”.

External balance requires a sustainable current account balance (CAB) in the country.

Accordingly, E is the real exchange rate which guarantees internal and external macroeconomic balances simultaneously, while external (policy) variables are at their sustainable levels.

It is expected that E is influenced by nominal and real variables in the short run, while it is affected only by real variables in the long run.

Long-Run Real Exchange Rate (E): Theoretical Overview


Long-Run Real Exchange Rate (E): Operational Definitions

Definition 1:“Base-Year Approach”

Basic PPP approach suggests that E is that real exchange rate which is valid when it is believed that the real value of a national currency is not over- or under-valued at that specific point of time.

Example: E is equal to the base-year value of an A index.(Selection of the base-year of A is crucial!)

Reference: Ahlers & Hinkle (1999)General Reference: Hinkle & Montiel (1999)


Definition 2:“Trend Approach”

Changing fundamentals also should change E! Therefore, the improved PPP idea allows for changes in E by defining E as a “time-varying trend value” of an A index.

Example: A’s trend value, which is calculated by employing the so-called Hodrick-Prescott filter.

Reference: Ahlers & Hinkle (1999)General Reference: Hinkle & Montiel (1999)



Definition 3:“Fundamentals-Based Reduced Form Approach”

E is that real exchange rate which ensures the internal and external balances in the economy at the same time.

Internal Balance: E guarantees that the labor and non-tradables markets are “cleared”.External Balance: E guarantees that the CAB is at its sustainable level.

References: Baffes et al. (1999), Montiel (1997), Edwards (1989)& Rodriguez (1994)General Reference: Hinkle & Montiel (1999)



E1: “Base-Year Value” of AFor each A index we have a different E1: E11, E12, E13 & E14.As the base year values of A1, A2, A3 and A4 are already set as1995 = 100, E1 values are simply given as: E11=E12=E13=E14=100.

E2: “Time-Varying Trend” of AFor each A index we have a different E2: E21, E22, E23 & E24.The values of E2 are calculated by applying the Hodrick-Prescottfilter methodology.

E3: “Estimated” Long-Run Value of AFor each A index we have a different E3: E31, E32, E33 & E34.Following cointegration analysis, the values of E3 are computed byconsidering the “actual” values of fundamentals.

E4: Long-Run Value of AFor each A index we have a different E4: E41, E42, E43 & E44.Following cointegration analysis, the values of E3 are computed byconsidering the “smoothed”, or long-run, values of fundamentals.

Long-Run Real Exchange Rate: Selected Es


Methodology Used to Calculate E3 & E4:

1. Time series properties of variables are investigated: Correlograms checked & ADF unit-root tests implemented

2. Integration degrees of series are determined: Nonstationarity in levels, I(1), and stationarity in first differences, I(0).

3. Investigated by using Johansen cointegration analysis whether series have more than one cointegrating vectors:Only one cointegrating vector found.

Long-Run Real Exchange Rate: E3 & E4


4. The Long-Run relationship between A indices and fundamentals are estimated by employing Engle-Granger approach:ln At = ß ln Ft + ut , F = (GOVGDPS, OPENS, TOT)

5. Tested whether the error terms are stationary:ADF unit-root tests showed that, in all equations, the error terms are stationary.

E3: computed by considering the “actual” values of fundamentals

E4: computed by considering the “smoothed”, or “long-run”, values of fundamentals.

MacDonald and Ricci (2003) are not in favor of the E3-type of definition. They argue that the E3 may only show the “short-run” equilibrium of A because of the effects of transitory shocks caused by fundamentals.

Long-Run Real Exchange Rate: E3 & E4


List of Potential Determinants of E3 and E4: Terms of trade (TOT) Productivity difference between tradables and nontradables sectors International differences between GDP growth rates Public sector expenditures to GDP (GOVGDP) Public sector investments to GDP Net exports to GDP Openness to international trade in goods (OPEN) Real world interest rates or international differences between real

interest rates Net foreign direct investments to GDP Net capital inflows from abroad to GDP Debt service to exports Absolute change in monetary base Public sector balance Net foreign assets of the central bank Public debts to GDP

Long-Run Real Exchange Rate: Fundamentals


Fundamentals Used to Explain Changes in E3 & E4:

Public Expenditures / GDP (GOVGDPSL)Sum of the real consumption and investment expenditures of the public sector divided by real GDPSource: SIS; authors’ calculations; log of the deseasonalized series

Openness to Trade in Goods (OPENSL)Total trade volume in current prices divided by nominal GDPSource : SIS; authors’ calculations; log of the deseasonalized series

External Terms-of-Trade (TOTL)Export price index divided by import price indexSource : SPO’s MEI, 1994=100; authors’ calculations; log of the TOT



2.3

2.4

2.5

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Long-Run Level

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OPENS

Long-Run Level

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TOTS

Long-Run Level


GOVGDPSL

OPENSL

TOTL


Real Exchange Rate Real Exchange Rate Misalignment:Misalignment:

Estimation Results for Turkey, Estimation Results for Turkey, 1987.q1 1987.q1 –– 2003.q3 2003.q3


Real Exchange Rate Misalignment (M)

A1 A2 A3 A4

E1 M11=(A1–E11)/E11

M12=(A2–E12)/E12

M13=(A3–E13)/E13

M14=(A4–E14)/E14

E2 M21=(A1–E21)/E21

M22=(A2–E22)/E22

M23=(A3–E23)/E23

M24=(A4–E24)/E24

E3 M31=(A1–E31)/E31

M32=(A2–E32)/E32

M33=(A3–E33)/E33

M34=(A4–E34)/E34

E4 M41=(A1–E41)/E41

M42=(A2–E42)/E42

M43=(A3–E43)/E43

M44=(A4–E44)/E44

16 Different Measures of Misalignment According to 4 Different Actual Real Exchange Rate Indices and 4 Different Equilibrium Definitions


E1-Type of Long-Run Real Exchange Rates

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E12

TNT

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E13

Reuters

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E14

SPO



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E21

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E22

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E23

Reuters

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E24

SPO



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E31

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E32

TNT

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E33

Reuters

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E34

SPO



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E41

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E42

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E43

Reuters

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E44

SPO


A1 Index & Alternative Measures of Long-Run Equilibrium

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TNT



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Reuters



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SPO



M1 Misalignment for Four A Indices

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No Misalignment (Equilibrium)

M11

M12

M13

M14

M > 0 => Real DepreciationM < 0 => Real Appreciation



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M21

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M24




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M31

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M34




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M41

M42

M43

M44



Four Measures of M According to A1

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M11

M21

M31

M41




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M12

M22

M32

M42




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M13

M23

M33

M43




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M14

M24

M34

M44



Correlation between Different Misalignment Measures:

16 Misalignment Measures: Any Similarity?

A1 A2 A3 A4 A1 A2 A3 A4 A1 A2 A3 A4 A1 A2 A3 A4

E11 E12 E13 E14 E21 E22 E23 E24 E31 E32 E33 E34 E41 E42 E43 E44

M11 M12 M13 M14 M21 M22 M23 M24 M31 M32 M33 M34 M41 M42 M43 M44

M11 1.000

M12 0.932 1.000

M13 0.656 0.595 1.000

M14 0.186 0.191 0.782 1.000

M21 0.705 0.607 0.852 0.670 1.000

M22 0.639 0.709 0.747 0.630 0.880 1.000

M23 0.628 0.525 0.954 0.756 0.901 0.771 1.000

M24 0.606 0.542 0.917 0.802 0.867 0.785 0.955 1.000

M31 0.955 0.910 0.767 0.424 0.812 0.758 0.729 0.715 1.000

M32 0.893 0.978 0.645 0.339 0.665 0.780 0.577 0.601 0.931 1.000

M33 0.787 0.687 0.932 0.609 0.848 0.728 0.936 0.894 0.829 0.706 1.000

M34 0.634 0.534 0.867 0.674 0.761 0.642 0.885 0.924 0.671 0.550 0.921 1.000

M41 0.967 0.912 0.754 0.394 0.799 0.733 0.713 0.694 0.995 0.922 0.829 0.681 1.000

M42 0.900 0.984 0.640 0.321 0.652 0.766 0.566 0.587 0.929 0.997 0.699 0.552 0.925 1.000

M43 0.789 0.696 0.962 0.643 0.855 0.740 0.956 0.916 0.846 0.715 0.978 0.898 0.839 0.713 1.000

M44 0.684 0.618 0.931 0.750 0.838 0.758 0.942 0.986 0.768 0.660 0.927 0.947 0.753 0.651 0.950 1.000

averages M11-M14 M21-M24 M31-M34 M41-M44

M11-M14 0.557 1.00

M21-M24 0.706 0.860 0.90-.099

M31-M34 0.727 0.766 0.768 0.80-0.89

M41-M44 0.747 0.781 0.834 0.805 0.70-0.79


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Maximum Misalignment


Minimum Misalignment


Degree of Differences between 16 M Measures


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Maximum Misalignment

Alper & Sağlam (2000)


Minimum Misalignment


Degree of Differences between 16 M Measures


Real Exchange Rate Real Exchange Rate Misalignment and Misalignment and Currency Crises:Currency Crises:

How far was “A” away from How far was “A” away from “E” in 2003 in Turkey?“E” in 2003 in Turkey?


Currency Crisis

MarketSentiments

“Weak”

Macroeconomic

Fundamentals

International

Contagion

Effects

Unexpected

Events

“Weak” Financial

Structure

Moral Hazard

& Adverse

SelectionSpeculative

Attack& Herding Effect

Sharp

Depreciation

Loss of

Intern. Reserves

Sharp Increase

in Interest Rates


Real exchange rate misalignment is one of the most important leading indicators of currency crises: Empirical studies show that a domestic currency is usually overvalued before a currency crisis.

Source for the Figure: Kibritçioğlu (2004), monthly data.

M23-Type Misalignment before Currency Crises in Turkey

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-24-22-20-18-16-14-12-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24

Pre-CrisisWindow

before July 1988crisis

before Jan. 1991crisis

before Feb. 1994crisis

before Dec. 1995crisis

before Feb. 2001crisis

Threshold = -6.8

cri

sis

pre-crisis window

The Relation between Misalignment and Currency Crises


Degree of Real Appreciation of the Turkish liraprior to 1994 & 2001 Currency Crises (%)

Negative signed figures above indicate the degree of real appreciation of the Turkish lira, while positive ones imply a real depreciation. That is, negative-signed figures show to what extent the relevant A index is below its equilibrium level, and vice versa.

M11 M12 M13 M14

1993 (annual average) -18.0 -16.2 -11.1 -12.4

2000 (annual average) -24.1 -16.1 -9.7 6.0

2003.I -12.9 -13.1 -9.7 0.6

2003.II -22.7 -24.3 -17.9 -10.4

2003.III -29.7 -32.6 -22.9 -15.2

2003 (annual average) -21.8 -23.3 -16.8 -8.3

M21 M22 M23 M24

1993 (annual average) -12.5 -10.5 -6.2 -6.3

2000 (annual average) -10.2 -5.0 -5.2 -3.1

2003.I 5.6 6.3 -0.4 -4.5

2003.II -6.0 -6.6 -8.7 -14.2

2003.III -14.1 -16.0 -13.7 -18.1

2003 (annual average) -4.8 -5.4 -7.6 -12.3

M31 M32 M33 M34

1993 (annual average) -15.4 -14.2 -5.8 -4.5

2000 (annual average) -14.0 -8.1 -6.1 -3.2

2003.I -1.4 -4.8 -5.3 -8.4

2003.II -14.7 -18.2 -12.4 -13.9

2003.III -22.0 -26.8 -17.2 -18.5

2003 (annual average) -12.7 -16.6 -11.6 -13.6

M41 M42 M43 M44

1993 (annual average) -15.1 -13.8 -5.2 -4.9

2000 (annual average) -14.5 -8.7 -6.5 -2.9

2003.I -1.6 -4.4 -4.0 -6.7

2003.II -12.8 -16.8 -12.4 -16.7

2003.III -20.7 -25.9 -17.6 -21.1

2003 (annual average) -11.7 -15.7 -11.3 -14.8

The Relation between Misalignment and Currency Crises


ConcludingConcludingRemarksRemarks


Overall Results of the Study

Selection of A for a Specific E Definition: The degree of the misalignment calculated is highly affected by the preferred “A”.

Note that the SPO’s index (A4) exhibits a significantly different development path in comparison to other A indices, particularly after 1996.

Selection of E for a Specific A Index: The degree of the misalignment calculated is highly affected by the definition of equilibrium used in the study.

The 16 measures of misalignment considered in this study show that the differences between these alternative measures vary between 6.5 and 36.5 percent points.

Since the degree of the real misalignment is one of the important leading indicators of currency crises, the reliability of measures of M is highly crucial for policy-makers.


Appendix:Appendix:Misalignment Estimations in Misalignment Estimations in

Previous StudiesPrevious Studies


Alper & Sağlam (2000), 1987-1999

Source: http://www.sba.luc.edu/orgs/meea//volume2/alper.html


Civcir (2002), 1987-2000

Source: http://www.erf.org.eg/9th%20annual%20conf/9th%20PDF%20Background/Finance/F-B%20Irfan%20Civir%20(Before).pdf

CPI based actualand equilibrium RERs(log. scale)


Özlale & Yeldan (2002), 1994-2001

Source: http://www.bilkent.edu.tr/~yeldane/ozlale&yeldan2002.pdf

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Misalignment ( 1/73 ) November 2004 Real Exchange Rate Misalignment in Turkey, 1987-2003 Aykut Kibritçioğlu Department of Economics Ankara University,