Exchange rate and the effects of sectoral real exchange rate volatility on foreign trade

After the breakdown of the Bretton Woods system in 1973, floating exchange rate regime has been criticized because of the possible negative effects of exchange rate volatility on foreign trade. Although there are many theoretical and empirical studies to determine the effects of exchange rate volatility on trade, there is no consensus on whether, or which direction, exchange rate volatility affects foreign trade. In this thesis, the effect of exchange rate volatility on Turkey?s foreign trade volume was analyzed the case of the 22 manufacturing sectors which are classified according to the ISIC Rev. 3. To this end, sectoral real exchange rate was calculated for 22 manufacturing sectors and sectoral real exchange rate volatility series obtained by using four different methods were included in the econometric analysis proses. According to the results of the econometric analysis which was carried out for the period 2005:Q1-2012:Q2 and using panel data analysis, there is no significant effect of sectoral real exchange rate volatility on sectoral import volume, while the effect of sectoral real exchange rate volatility on sectoral export volume is positive and significant. Thus, the net effect of the sectoral real exchange rate volatility on sectoral trade volume is trade increasing. Keywords: Sectoral real exchange rate, volatility, sectoral foreign trade