THE EFFECT OF REAL EFFECTIVE EXCHANGE RATE ON IMPORTS AND EXPORTS: AN APPLICATION ON TÜRKIYE

Abstract

The trade balance, which represents the difference between a country's export and import values, plays a crucial role in determining its economic health. Exchange rates, defined as the prices at which one currency can be exchanged for another, have a significant impact on a country's trade balance. Fluctuations in exchange rates can influence the competitiveness of exports and imports and, consequently, the trade balance. One of the most notable studies in this context is the Marshall-Lerner condition, which states that if the sum of the price elasticities of demand for a country's exports and imports exceeds one, a devaluation (or depreciation) of the country's currency will improve its trade balance. In simpler terms, if the combined response of export and import volumes to changes in prices is sufficiently high, a devaluation of the currency can lead to an improvement in the trade balance. The relationship between exchange rates and the trade balance is complex and depends on numerous factors, such as the exchange rate regime, demand elasticities, and time lags. Therefore, a depreciation in a country's currency does not always lead to an improvement in the trade balance. This study examines the impact of Turkey's real effective exchange rate on imports and exports between 2018 and 2024. To investigate the long-term relationship, the Bayer-Hanck (2013) Cointegration Analysis was employed, while the Error Correction Model was applied to explore short-term relationships. The result of the analysis; The Bayer-Hanck cointegration test results indicated long-term relationships between the real exchange rate (REDK) and exports (IHR) and imports (ITH). However, FMOLS estimates revealed that these relationships are not statistically significant for the analyzed period. The VECM results failed to establish any statistically significant short-term relationships between REDK and the dependent variables, indicating the absence of significant short-term dynamics.