The effects of exchange rate uncertainty on foreign trade: VAR-MGARCH approach and case of Turkey

Problems caused by exchange rate uncertainty have direct and indirect effects on Turkey's foreign trade flows. Importance of the effects of exchange rate uncertainty leads the subject to be investigated in different statistical methods and different period intervals. As a result of the studies, it has seen that contradictory findings have appeared. In the literature, the ignorance of the size of shocks and interaction between Turkey's foreign trade partners are seen as the main factors of the emergence of different results. For this purpose, taking into account the volatility and the propagation of volatility in exchange rate, the effect of exchange rate uncertainty on foreign trade flows have investigated by VAR – MGARCH method by using monthly data set for 1994: 1-2019: 1. As a result of the analysis, the effect of exchange rate uncertainty on foreign trade has found as positive. Whether exchange rate uncertainty affects trade positively or negatively depends on economic agents' attitude towards exchange rate risk. The increase in the unpredictable costs of the firms avoiding risk due to exchange rate fluctuations caused by exchange rate volatility may cause decreases in foreign trade.