Abstract:

This paper investigates the short-run and long-run impact of real exchange rate on the bilateral trade balance of Turkey with EU (15) countries. We’ve employed the bounds testing approach to the cointegration and the error correction modeling. Following Yazici and Islam (2011a, 2011b, 2012) and Yazici (2012), we select the optimal model from the set of those models that satisfy both diagnostic tests and cointegration. Thus, unlike the other studies, it is ensured that a statistically reliable and cointegrated model is picked up for estimation. Based on the quarterly data for 1982-I to 2001-IV period, estimation results indicate no evidence of J-curve in the short run in any of Turkey’s bilateral trade with EU(15) countries. In the long run, however, real depreciation of Turkish Lira improves the trade balance of Turkey with Austria, Denmark, France, Ireland, Italy, Sweden and UK.

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