The Effect of Exchange Rate Volatility on Bilateral Trade between Turkey and European Union Countries: Asymmetric Analysis with Markov Regime Switching Models
Keywords:Real Exchange Rate Volatility, Bilateral Trade, European Union Countries, Kruse (2011) Nonlinear Unit Root Test, Markov Regime Switching Models
This study aims to reveal the asymmetric effect of real exchange rate volatility on bilateral trade between Turkey and 8 European Union member countries under different economic cycles. Accordingly, monthly data from January 2005 to December 2021 were analyzed with Markov regime switching models. The findings show that an increase in real exchange rate volatility reduces bilateral trade between Turkey, Belgium, and Germany during periods of economic expansion, while bilateral trade between Turkey and Poland decreases during periods of economic contraction. In addition, while it was detected that an increase in real exchange rate volatility decreased the bilateral trade between Turkey and Italy, and Romania in both expansion and contraction periods of the economy, no significant finding was obtained regarding the effect on bilateral trade between Turkey and France, the Netherlands and Spain. The findings prove that the Marshall-Lerner condition and J-curve effect are not valid in trade with the relevant EU countries.
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