The Dynamic Effect of Exchange-Rate Volatility on Turkish Exports: Parsimonious Error-Correction Model Approach

Abstract

This paper aims to investigate the effect of exchange-rate stability on real export volume in Turkey, using monthly data for the period February 2001 to January 2010. The Johansen multivariate cointegration method and the parsimonious error-correction model are applied to determine long-run and short-run relationships between real export volume and its determinants. In this study, the conditional variance of the GARCH (1, 1) model is taken as a proxy for exchange-rate stability, and generalized impulse-response functions and variance-decomposition analyses are applied to analyze the dynamic effects of variables on real export volume. The empirical findings suggest that exchange-rate stability has a significant positive effect on real export volume, both in the short and the long run.

Key words: Exchange-rate volatility, Export function, Parsimonious error-correction model, Cointegration, Turkey.
JEL: F10, F31.