EXCHANGE RATE VOLATILITY, THE LINDER THEORY AND TURKEY'S FOREIGN TRADE

Hasan VERGİL (Zonguldak Karaelmas University)

The determinants of bilateral trade across countries are commonly explained by (i) the gravity model, (ii) the Linder theory, and (iii) the effect of exchange rate volatility. In the gravity model, the amount of trade between two countries is assumed to be increasing in their national incomes, and decreasing in the distance between them. The Linder theory postulates that a large amount of trade will occur in manufactured goods among countries with similar income levels and demand patterns. Finally, studies dealing with the effects of exchange rate volatility on trade yielded ambiguous results.

This paper empirically examines the Linder theory for Turkey and the impact of exchange rate volatility on Turkey's trade flows by constructing two different gravity type trade models. First, the fixed effects panel data model is constructed by using bilateral trade flows of Turkey to its ten largest trade partners. Second, a multivariate error-correction model is developed by using Turkey's exports of manufactured goods parallel to the Linder theory. In the models, three different measures of exchange rate variability are used and the sample period is from 1975:1 to 1999:4. The empirical findings from this study have important policy implications for the pattern of industrialization and international trade.