J-Curve and Impact of Exchange Rate on Bilateral Trade between Turkey and its Two Trading Partners; Germany and the United States

Abstract

In This paper, we try to investigate Marshall-Lerner condition and J-curve effect on bilateral trade between Turkey and itstwo major partners by employing Nonlinear Autoregressive Distributed Lag (NARDL) and Johansen-Juselius cointegration approaches. The study is mainly focused on estimating J-curve effect of devaluation by employing an aggregate trade data on bilateral trade between Turkey-Germany and Turkey-USA over the period from 2005Q04-2020Q01 (before outbreak of covid-19 pandemic). The methods are selected depend on stationary degree of series in each model. In case of Turkey-Germany the series aremixed integrated series (i.e. I(1) and I(0)) that allow us to use NARDL models and estimate asymmetric effects of real exchange rate on trade balance. In case of Turkey-USA, all the series are integrated at I(1) that lead us to apply for Johansen - Juselius cointegration approaches. Findings support J-curve phenomenon in both Turkey-Germany and Turkey-USA. These results indicate that a depreciations/decrease on Turkish Lira has long run and positive effect on trade balance of Turkey. Thus, devaluation in Turkish Lira canimprove the trade balance (i.e. eliminate persistent balance of payments deficits) of bilateral trade between Turkey-Germany and Turkey -USA.