The Relationship between Productivity, Relative Prices and Real Exchange Rates in Turkey

Abstract

In this study, the relationship between productivity, relative prices, and real exchange ratesis investigated for Turkey in the period of 2005:Q1–2016:Q4.We estimated three different models to measure the effect of prices of non-traded goods and relative labor productivity on real exchange rates, and the effect of relative labor productivity on the prices of non-traded goods. Empirical models are estimated by using ARDL approach. Results show that although there are strong positive links between relative labor productivity and prices of non-traded goods, the effects of relative labor productivity and prices of non-traded goods on real exchange rate are found significant and negative, converse to the Balassa-Samuelson hypothesis.

Keywords: Balassa-Samuelson effect, Real exchange rate, Productivity, Traded and non-traded goods, Relative prices.