Abstract:

In the following years after the collapse of the Bretton Woods System in 1973, many countries including Turkey adopted a flexible or a managed floating exchange rate system. This has led to a high volatility in the exchage rates, which is thought to be quite influenatial on foreigh trade. Therefore, it became imperative for policy makers to evaluate the potential effects of exchange rate volatility on international trade. To this end, this study investigates the impact of exchange rate volatility on import demand in Turkey. Further, the study disaggregates imports into two sectors: import demand on consumption goods and on investment goods (inlcuding intermediate goods) in order to see whether volatility in exchange rate has differing impacts. Using monthly data over 1989-2008 periods, the study firstly performes an ARDL bounds test to check if the variables of interests form a cointegrating relationship and then specifies an ARDL error correction model to investigate the short run dynamics between import demand and volatility. The findings indicate that while volatility and import demand on investment goods are cointegrated and are negatively related, there is no cointegrating relationship between exchange rate volatility and import demand on consumptions goods.     

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