Real exchange rate and terms of trade relations in developing countries: 2000-2016 example

At the forefront of the major problems of the country's economies in the globalizing world are the selection of stable exchange rate policies and the application of these policies. It is significant to determine the appropriate exchange rate policies with respect to the foreign trade characteristics of the countries and to be understood its effect on the foreign trade balance by these countries. While this situation is a problem for developed economies, it has a more vital proposition for developing economies. While developing countries apply policies to increase their exports, they also attempt to manage many macroeconomic variables in order to increase export volume. This study aims to examine exchange rate determinants in developing countries in terms of foreign trade momentum. When the current studies on the determinants of exchange rates are examined, models in these studies were developed by using a variety of different macroeconomic variables. Different from other studies, models used in the study of Drine and Rault, published in 2004, were based on. Additionally, these models were necessarily harmonised for this study. As the relationship between foreign trade rates in the developing countries is examined as the real exchange rate determinants, variables, the basic variables of foreign trade, GDP per capita, foreign direct investments and public expenditures, are determined as control variables. In the application section of the study, exchange rates between 2000-2016 of 21 developing countries determined by Standard & Poor's and the relationship of foreign trade rates were analysed by using panel data analysis. The data of these countries were analysed by using correlation, horizontal section dependency, homogeneity and unit root, then these data were tested by cointegration and causality tests. In the short period, foreign trade rates have an effect on the real exchange rate; conversely, in the long period it is seen that not only foreign trade rates but also the per capita GDP, direct foreign investments and public spending have a causality relation towards real exchange rate.