Examining the Effects of Remittances, Labor Productivity and Trade on Real Effective Exchange Rate: Case of Turkey

Financial and economic development of a country is a crucial matter for every nation. There are various factors and elements that carry a major role in this regard and the literature shows numerous variables that are regarded as vital for this improvement. However, most studies examined countries in regions that are relatively far from the Middle East and Especially, Turkey. Hence, the current research entails a number of influential factors that have been noted to be significant for improving real effective exchange rate of the country, especially in the long-term. It is assumed that changes in Remittances, Labor Productivity, Trade (Openness) could impact on the changes in Real Effective Exchange Rate in the context of Turkey. These factors are remittances, labor productivity, and trade openness. It is important to note that while these factors have been under examination since early ages of research on econometric variables, the literature lacks consensus upon findings, particularly, empirical evidence. Thus, the current research aims to provide a better understanding of underlying effects and linkages among these variables. Data (2000-2017) from central bank of Turkey that was made public is used as well as indicators of OECD. Modern tools and analytical approaches have been undertaken to examine the relationships between the included factors and measures have been derived from the extant literature to ensure the reliability and validity of the results. All hypotheses of the research have been supported through data analysis. It can be said that increased remittances have a positive effect on a country’s real effective exchange rate in long-term. Increased trade openness was found to be negatively associated with REER. This is due to the fact that trade openness leads to increased price of domestic goods for other nations. Labor productivity is positively related with REER as Turkey exhibits high productivity in its labor, which further impacts its economic state in terms of effectiveness of its exchange rate. The findings of this research are aimed to contribute to the literature as well as practical approach towards analyzing and understanding connections among the aforementioned variables. Keywords: Real Effective Exchange Rate, Remittance, Labor Productivity, Trade Openness, Turkey, Economics.