The exchange regime and trade balance in Turkey

ABSTRACT

Over the last 15 years, high trade deficits have become a source of external vulnerability for the relatively stabilized Turkish economy. This corresponds to the period where authorities have been following a floating exchange rate regime. Thus, this study aims to empirically show whether the adopted exchange rate regime has an impact on the trade balance for the period of 1987 Q1 to 2015 Q2. Estimation results indicate that there is a long-run relationship between the real effective exchange rate and trade balance under both fixed and floating regimes in Turkey, but there is no evidence for the J-curve hypothesis.

KEYWORDS:

• Exchange rate regime
• J-curve
• trade balance
• Turkey

Acknowledgments

We would like to thank two anonymous referees for their comments.

Notes

¹ The aggregated approach was used since policymakers are more interested in single, averaged outcomes than in case-by-case information (Stucka 2004).

² Yusoff (2010) is another study that adopted a similar approach in order to see the effect of the exchange rate regime on the determinants of the trade balance in the case of Malaysia.

⁵ The weights for the Turkish trade partners are as follows: Germany 33%, Italy 17%, US 16%, France 14%, UK 13%, and Netherlands 7%, respectively.

³ See Brown, Durbin, and Evans (1975) and Bahmani-Oskooee and Brooks (1999) for further details about these tests.

⁴ Note that the results of the impulse response analysis for all variables for all periods are shown in Appendices C, D, and E.