İtobiad (Dec 2021)
Impact of The Real Effective Exchange Rate on Turkey's Bilateral Trade With 27 European Union Countries: FADL Cointegration
Abstract
Exchange rate policies have become important after the change resulting from the Bretton Woods system. Until today, different exchange rate systems were implemented in Turkey. Drastic changes in the Turkish Lira's value before and after economic crises led to the questioning of the exchange rate system in Turkey. Fluctuations have increased due to the determination of exchange rates within market conditions. With several macro-economic variables, changes in exchange rates impacted exportation and importation as well, causing uncertainty for both.EU countries have a significant share in Turkey's foreign trade regarding exports and imports. In the EU, local currencies are in use along with the EU's common currency, the Euro. A significant impact of economic unions is the inbound deviation within the union regarding trade with non-members. Monetary union among member states increases the importance of exchange rate fluctuations in non-member states such as Turkey.This study investigates the long-term relation between bilateral trade and real effective exchange rate in terms of Turkey's trade with 27 EU countries. Data regarding the 1998-2020 period's GDP, real effective exchange rate, imports and exports was investigated by Fourier ADL cointegration test. For series' stationarity, ADF and FADF tests were used; all series were determined as I (I). According to the results of the FADL cointegration test, a cointegration relation was determined for both models, where exports and imports were dependent variables. This study has found that real effective exchange rate does not have a statistically significant impact on Turkey's import and export with 27 EU countries.
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