Real Exchange Rate and Trade Balance in Turkey: Evidence from Heterogeneous Panel Data

Abstract

In this study, the effect of real exchange rate on bilateral trade balance between Turkey and its 25 main trade partners is investigated for the period of 1996 – 2015 with heterogeneous panel data techniques. Trade balance model is estimated by using Mean Group (MG) estimator, which allows parameter heterogeneity, Common Correlated Effects Mean Group (CCEMG), and Augmented Mean Group (AMG) estimators, which both allow cross-section dependency and heterogeneity. Results indicate that the real exchange rate elasticity of the trade balance ranges between -0.40 and -0.45 and Marshall-Lerner (ML) condition is valid for Turkey. According to the results, the foreign income elasticity of trade balance ranges between 1.54 and 2.84, while for domestic income elasticity, it is found between -0.75 and -1.38. Country-specific results show that ML condition is valid for the USA, Belgium, Spain, Switzerland, Romania, and Russia at the bilateral level according to both CCEMG and AMG estimators. 

Keywords: Marshall-Lerner condition, Panel data, Cross-section dependence, Mean group estimators. 

JEL: C23, F14, F31.