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02/05 Dynamics of the trade balance: The Turkish J-curve

Elif Akbostanci

Abstract: The J-curve hypothesis suggests a specific pattern for the response of trade balance to real exchange rate changes: a real depreciation initially worsens the trade balance, but through time the trade balance improves, and thus the response of the trade balance over time generates a tilted J shape. This study investigates the existence of a J-curve in the Turkish data in the period of 1987-2000, by using quarterly data. First an error correction model is estimated to differentiate between the long-run equilibrium and short-run dynamics. Then the response of trade balance to real exchange rate shocks are investigated by using the generalized impulse response methodology. Even though the suggested long-run pattern, which is the improvement of the trade balance in response to a real depreciation emerges, our results do not exactly support the J-curve hypothesis in the short-run. In this study we found that the short-run behavior of the trade balance in response to real exchange rate shocks show an S-pattern reminiscent of the Backus et al (1994) rather than the J-curve pattern.

JEL Classification: F30, F32, F41

Key Words: J-Curve, trade balance, Marshall-Lerner condition, cointegration, impulse response analysis

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