The relationship between exchange rate and foreign trade: An analysis on Turkey

Positive developments in international trade and capital flows have led to an increase in trade between countries and the relationship between exchange rates and foreign trade has come to the fore. Analyzing the effects of the exchange rate on the trade balance in Turkey where the trade deficit is crucial. This has been the motivation for writing this study. In this study, two separate models based on exports, real effective exchange rate and foreign income and two separate models based on imports, real effective exchange rate and domestic income are used to analyze the relationship between exchange rate and foreign trade in Turkey. Between January 2002 and October 2022, stationarity analyses were performed with the help of data covering the period between January 2002 and October 2022, and then Vector Autoregressive (VAR) Model, Johansen Cointegration Test and Granger Causality analysis were used. As a result of the analysis, when the export model is analyzed: i) According to the Johansen Cointegration Test, there is no cointegration relationship between the series, ii) According to the FMOLS and DOLS results, the coefficients are positive and significant, iii) According to the Granger Causality analysis, there is only unidirectional causality from exports to foreign income. Regarding the import model: i) According to Johansen Cointegration Test, there is 1 cointegration relationship between the series, ii) according to FMOLS and DOLS results, the coefficients are positive and significant, iii) according to Granger Causality analysis results, there is unidirectional causality from real exchange rate to imports and from domestic income to imports.