The Harberger-Laursen-Metzler effect (practice on Turkey)

In this thesis, Harberger-Laursen-Metzler Hypothesis which suggests that other things being the same, positive (negative) movements occuring in the terms of trade on any country induce also positive (negative) movements in trade balance of that country has been reviewed and discussed in both theoritical and empirical aspects. After presenting the theoritical details of Harberger-Laursen-Metzler Hypothesis regarding its descriptive and analytic characteristics, working mechanism and transmission channels, an empirical analysis has been devoloped by determining directions and aspects of causality relations between the terms of trade and trade balance in 1991:4-2003:3 period in Turkey. Engle-Granger Co-Integration Test, Granger Causality Test, Hsiao Causality Test and Vector Autoregressive Method have been utilized to define directions and aspects of causality relations between the terms of trade and trade balance. According to achieved empirical results; (1) There is a unidirectional and short-term causality relation between the terms of trade and trade balance which is from the terms of trade to trade balance. However, the causality relation is on the negative direction by implying non-existence of Harberger-Laursen-Metzler Hypothesis in Turkey in that period. (2) That trade balance has no effect statistically meaningful on the the terms of trade can be suggested to support "Small Open Economy Presumption" which stipulates that the terms of trade is determined exogenously in the devoloping countries. Those achieved results have implied that being reduced purchasing power of exports by devaluating the currency, in other word, being influenced negatively to the terms of trade, can decrease trade deficit in the short-run, namely, Marshall-Lerner Condition may be valid even in the short-run. However, trade balance will return to steady state level in the long-run. VII