Abstract:

In this study, the short run and the long run relationships between real exchange rate movements of Euro and trade balance developments on Turkey’s bilateral trade with Germany have been investigated. The monthly data for the period of 2002.01-2012.09 were used and unit root tests, cointegration techniques, vector error correction model and causality test were carried out respectively. Main findings reveal that real exchange rate elasticity of trade balance is negative in the short run and positive in the long run. This indicates that Marshall-Lerner condition does not hold in the short run and so there is evidence supporting J-curve adjustment process. One of the other variables that determine trade balance in the model is industrial production index of Turkey used as the proxy of domestic income. This variable effects trade balance adversely in chiefly the long run while industrial production index of Germany used as the proxy of foreign income does positively.