The J-Curve Analysis: Evidence From the Bilateral Trade Between Turkey and Euro Area

Abstract

This thesis aims to investigate the validity of the J-curve hypothesis for the bilateral trade between Turkey and Euro Area. The short-run dynamics and long-run relations among variables are analyzing with the monthly data during the period of 2003M1-2018M12. Bounds Test approach depended on Autoregressive Distributed Lag model is used to find the cointegration relation among variables in the long-run. Also, The Error Correction Model is employed to determine short-run dynamics among variables. In the trade balance model, trade balance which is defined as the ratio of exports to imports is used as dependent variable while bilateral real exchange rate and industrial production indices as proxy for incomes of Turkey and Euro Area are employed as explanatory variables. The empirical results reveal that there is a cointegration relation among variables in the long-run. In addition, it is found that increases in real exchange rate affect positively trade balance both in the short-run and long-run. In other words, increases in real exchange rate (depreciation of Turkish Lira) improve trade balance both in the short-run and long-run. Therefore, it can be concluded that J-curve hypothesis is not valid for the bilateral trade between Turkey and Euro Area. According to findings of this study, income of Turkey does not have any impact on trade balance whereas income of Euro Area affects positively trade balance in the long-run.