The relationship between foreing exchange rates and foreign trade deficit in Turkey: The period after 2010

Economies inevitably affect each other in the globalizing world. Changes in foreign exchange rates determine the direction of how countries affect each other by doing foreign business. Foreign trade balance is the balance between imports and exports of a country. Whereas export volume is equal to the total value of the goods sold abroad; import volume is equal to the total value of the goods bought from abroad. These items are in close relationship with the foreign exchange rates. The foreign trade deficit has become a chronicle problem for developing countries like Turkey. In this regard, the relationship between foreign trade deficit and foreign exchange rates continues to be a usual subject matter for studies. The hypothesis of this study is that there is a causal relationship between real effective exchange rate and foreign trade. Depreciated Turkish Lira, in other words, decrease in real effective exchange rate is expected to result in recovery in foreign trade balance in accordance with the general expectations. The aim of this study is to reveal the relationship between real effective exchange rate and foreign trade between 2011:01-2020:04 by forecasting VAR model with Eviews 9 program and using the analysis of Johansen cointegration, Granger causality, impulse response analysis and variance decomposition analysis. The existence of the relationship observed by using the analysis of Johansen cointegration and the direction of the causal relationship between real exchange rate and foreign trade are determined by using the analysis of Granger causality. Results are in accordance with theoretical expectations.