Real Effective Exchange Rate and Trade Balance Adjustment: The Case of Turkey

June 28, 2019

Preview Citation

Format: Chicago

Plamen K Iossifov, and Xuan Fei. Real Effective Exchange Rate and Trade Balance Adjustment: The Case of Turkey, (USA: International Monetary Fund, 2019) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

There is an ongoing debate in the literature on whether global trade flows have become disconnected from the large real effective exchange rate movements in the wake of the global financial crisis. The question has important policy implications for the role of exchange rates in supporting growth and restoring external balance. In this paper, we use Turkey---a large and open emerging market economy that has experienced sizable swings of the real effective exchange rate---as a case study to test competing hypotheses. Our results lend support to the finding in existing cross-country studies that the real effective exchange rate remains an important determinant of trade flows. But, its effect is not symmetric in secular periods of appreciation and depreciation and is, oftentimes, dwarfed by the impact on trade flows of the income growth differential between trade partners.

Subject: Foreign exchange, Income, International trade, National accounts, Real effective exchange rates, Real exports, Real imports, Trade balance

Keywords: ARDL model, Consumer goods, Exchange rate, Export-import ratio, Global, Growth differential, Income, Income elasticity, Interaction term, Long-run elasticities coefficient, Long-run REER elasticity, Real effective exchange rates, Real exports, Real imports, REER, REER depreciation, REER elasticity, Trade balance, Trade elasticity, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/131
Stock No:

WPIEA2019131
ISBN:

9781498312738
ISSN:

1018-5941

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