DYNAMICS OF THE TRADE BALANCE: THE TURKISH J-CURVE

Elif AKBOSTANCI (Middle East Technical University)

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 trade balance improves, and thus the response of trade balance over time generates a 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 and error correction model will be estimated to differantiate between the long-run equilibrium and short-run dynamics. Then the response of trade balance to real exchange rate shocks will be investigated by using the generalized impulse response methodology.