The relationship between exchange rate policies and the terms of trade: an application in Turkey (1984?2007)

In this study, the relationship between ecxhange rates and the terms of trade is examined. Firstly, the exchange rate policies and exchange rate with its? varieties are examined and secondly, the terms of trade are examined with a speacial focus on the details. After examining the relationship between exhange rate and the terms of trade from a theoretical view, the exchange rate policies executed in Turkey during the period 1984-2007 are seperated into four different terms. Firstly, econometric analyses are done via using VAR analysis depending on the monthly data from the exchange rates and terms of trade as the first term 1984-1988; flexible rate policy, the second term 1989-1994; flexible rate policy, the third term 1994-2001; fixed rate policy, and finally the fourt term 2001-2007; flexible rate policy. The results obtained from this study are discussed through using granger causality analysis, impulse response functions and variance decomposition. Upon getting the results of the analysis, no meaningful and causal relationship between the exchange rate and terms of trade is found for the first term. But for the second term, a causal ralationship is found from exchange rate variable to the terms of trade. In the third term, there is a slight relationship between the exchange rate and the terms of trade. In the final term, a causal relationship is found from the exchange rate to the terms of trade and the two variables are found to be moderately related to each other.