The effects of exchange rate and parity volatility on foreign trade: The case of Turkey

After the collapse of Bretton Woods fixed exchange rates system in early 1970's, the exchange rates were set free to fluctuate in the world economies. As a result of this fluctuation, major volatilities were observed in exchange rates. Although there are many studies in empirical literature investigating the effects of exchange rates volatility on foreign trade volume, there are a few studies which focus on both exchange rate volatility and parity volatility. This study, differing from previous studies, investigated the effect of exchange rate volatility in terms of Dollar and Euro and also Dollar/Euro parity volatility on the Turkey's export and import volumes. By using quarterly data covering the period 2001 – 2014, effects of exchange rates volatilities and parity volatility on export and import volume of Turkey were separately investigated. In this study, volatility series were obtained by using the method of moving standard deviations. By employing Autoregressive Distributed Lag (ARDL) Model boundary test, it was investigated whether export and import models include long-term cointegration. Results of the ARDL boundary test have indicated there is a cointegration relationship in export models, but there is no cointegration relationship in import models. For this reason, while export models have been analyzed with ARDL models, import models have been analyzed with ordinary least square (OLS) method. The econometrics analyses have demonstrated that exchange rates volatiles have negative impact on export volume in long-term, but in short-term there is not any effect of exchange rates and parity volatiles on export volume. Dollar exchange rate volatility and parity volatility's growth rate have negative impact on the growth rate of import volume, but Euro exchange rate volatility's growth rate does not have effect on import volume growth rate. Key Words: Exchange Rate Volatility, Parity Volatility, Export Volume, Import Volume, ARDL