Determinants of the Trade Balance in the Turkish Economy

Abstract

The Turkish economy has a long-run problem of trade deficits. Several efforts and different policies over the last 50 years could not find any permanent remedy to this problem which is an important source of external vulnerability for the Turkish economy. Thus, this study aims to shed light on the trade balance dynamics in Turkey via Johansen cointegration test, vector error correction model, and impulse-response analysis, for the period 1987-2015. Estimation results indicate that in the long-run an increase in real effective exchange rate improves trade balance, while an increase in Turkish (foreign) income improves (deteriorates) trade balance. In the short-run, real effective exchange rate has no impact on trade balance, while an increase in domestic and foreign income negatively affects the Turkish trade balance. The impulse-response analysis also shows that the J-curve hypothesis does not hold for the Turkish case.