Analysis of Turkey's trade balance response to oil price changes: Treshold vector authoregression model application

Structural shifts in oil supply and oil demand, sharp and unexpected fluctuations in financial markets, major oil price shocks, speculative transactions in international commodity markets and increasing uncertainties due to macroeconomic and regional geopolitical risks, and etc. might increase volatility of oil prices. Oil price fluctuations cause supply-side effects in oil-importing countries whereas demand-side effects in oil exporting countries. Oil-exporting countries are positively affected from the oil price increases through income channel. For oil-importing countries, oil price increases may inflate production costs in the manufacturing industry and cause a slowdown in growth and productivity. On the other hand, oil-exporting countries may face Dutch Disease and decreasing aggregate output due to the appreciation of domestic currency and drastic shifts in factors of production. However, increasing costs and asset transfers to oil-exporting countries will cause a depreciation of domestic currencies of the oil-importing countries, which makes their exports attractive. Thus, monetary policies pursued by central banks have great importance in order to restore the possible deterioration in these economies. In order to engineer precise and efficient policies to mitigate the negative effects of oil-market price shocks, processing accurate signals in volatile oil price environment is pivotal for monetary authorities. This thesis empirically examines the effects of oil prices on the trade balance of Turkey, which depends heavily on oil imports. Unlike the other studies on this subject, in this thesis, the relationship between oil prices and trade balance is investigated by regime-dependent impulse response functions and forecast error decompositions based on multivariate Threshold VAR (TVAR) model comparing with linear VAR model. The findings suggest that, the relationship between oil prices and trade balances is non-linear. In the regime of higher oil price volatility, total trade balance, non-oil and non-gas trade balance, intermediate goods trade balance and consumption goods trade balance respond stronger to oil price shocks than lower regime and linear VAR model. While oil price increase in the high regime deteriorates the total trade balance, non-oil and non-gas trade balance and intermediate trade balance is positively affected from oil price increases. Moreover, consumption goods the trade balance found to be the most affected by oil price shocks according to the impulse-response functions and variance decomposition analysis. Finally, the findings obtained from linear VAR and lowest regime are generally similar and has less effect on trade balance components.