Abstract:

The theoretical connection between the exchange rate and the trade balance is explained by the Marshall-Lerner Condition and the J-curve hypothesis. A real depreciation of the local currency makes exports cheaper and imports more expensive, thus improving the trade balance. According to the Marshall-Lerner Condition, the success of real depreciation of the local currency depends on whether the sum of the elasticities of the import and export demand is more than one. Moreover, it is argued that a real depreciation of the local currency does not have an immediate impact on the trade balance, but rather deteriorates it in the short term before getting better in the long term. This is called the J-curve hypothesis, which expresses the dynamic view of the Marshall-Lerner Condition that reflects how devaluation affects the trade balance over time. The purpose of the study is to examine the relationship between the exchange rate and trade balance in Türkiye for the period 2010:1-2022:12. Due to the asymmetric relationship between the variables used, this relationship is analyzed with the Nonlinear Lag Distributed Autoregressive Model (NARDL) approach. The outcomes of the study reveal that the J-curve hypothesis is valid in Türkiye during the period under review.

Keywords: