Imported Input Content of Production and Real Exchange Rate Elasticity of Exports: The Case of Türkiye

Advances in the integration to global value chains lead the use of imported inputs in production to increase. While the use of foreign intermediate products in domestic production may be linked with productivity gains over the medium-to-long term, the extent of the import dependency in production may also matter, especially from a trade-elasticity perspective. This study examines whether the import dependency of production in the manufacturing sectors in Türkiye plays a role in the relationship between real exchange rate movements and variations in export volume. Estimations regarding the short-run and long-run dynamics and the impulse response functions from the local projections provide evidence that the degree of import dependency does matter in terms of the responsiveness of export demand to the real exchange rate dynamics. Manufacturing sectors with relatively lower import dependency have higher real exchange rate elasticity of exports, which indicates that the firms in those sectors, on average, are more elastic in the price determination process with respect to the real exchange rate fluctuations. On the other hand, the results of the study show that the main determinant of Türkiye’s exports is the variations in external demand, and the effect of real exchange rate movements on export volume is relatively limited.