TURKEY'S TRADE BALANCE IN THE SHORT AND THE LONG RUN: ERROR CORRECTION MODELING AND COINTEGRATION
This article examines the relationship between the balance of trade and the real exchange rate for the Turkish economy. A cointegration test is carried out to estimate the long-run elasticities. A real depreciation improves the Turkish balance of trade in the long run, implying the validity of Bickerdike-Robinson-Metzler condition. Subsequently, an error-correction model is developed to study the dynamic adjustments in the short run. The effects of a real depreciation last about a year. Approximately three-fourths of the adjustment to long-run equilibrium takes place in the first quarter. Given the dependence of Turkish exports on the imported intermediate goods, contraction in imports can explain this immediate betterment. However, the trade balance worsens three quarters after a real depreciation as the increased costs of the imported materials are passed on to export prices.
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