Academic journal article Agricultural Economics Review

Exchange Rate and Turkish Agricultural Trade Balance with EU (15)

Academic journal article Agricultural Economics Review

Exchange Rate and Turkish Agricultural Trade Balance with EU (15)

Article excerpt


This paper investigates the short-run and long-run impact of exchange rate on the trade balance of Turkish Agriculture with EU (15) countries. The bounds testing approach to the cointegration and the error correction modeling is employed. A new strategy in the model selection phase is adopted and the optimal model is selected from the set of those models that satisfy both diagnostic tests and cointegration. Thus, unlike the previous literature utilizing this approach, it is ensured that a statistically reliable and cointegrated model is picked up for estimation. Estimation results based on the data for 1988-I to 2008-IV period indicate that in the short-run real exchange rate variable affects agriculture trade balance in trade with EU(15) and depreciation of Turkish Lira improves the trade balance. As for the long-run impact of the exchange rate, depreciation of domestic currency has a statistically significant negative effect on trade balance of agriculture.

Keywords: Bounds Testing Approach, Depreciation, J-curve, Trade Balance, Agriculture Sector

(ProQuest: ... denotes formulae omitted.)


The exchange rate, mainly because of being able to generate the effect of both an export subsidy and an import quota, has attracted the attention of economists for a long time. Initial studies of exchange rate such as Kreinin (1967), Khan (1974) and Warner and Kreinin (1983) concentrated on testing whether Marshall-Lerner condition was satisfied or not.1 It was later observed that in spite of the satisfaction of the MarshallLerner condition, the trade balance worsened. To explain this apparent contradiction, the J-curve phenomenon was put forward by Magee (1973). This phenomenon was based on the observation that prices respond to exchange rate changes instantaneously but volumes don't respond right away but with some lags. Therefore, as a result of devaluation, the trade balance first worsens (price effect dominates) and then after the passage of sometime the volume effect takes over and the trade balance begins to improve. After the introduction of J-curve phenomenon by Magee (1973) and the realization that looking at Marsall-Lerner condition is an indirect way and takes into consideration only the long run, researchers begun to relate the trade balance directly to exchange rate, in addition to some other variables. Examples of this type of work include Bahmani-Oskooee (1985), Marwah and Klein (1996), Wilson (2001) and Lai and Lowinger (2002). 2

The impact of exchange rate changes on agricultural trade balance is investigated in the literature but in a few papers, which, to the best of our knowledge, are Carter and Pick (1989), Doroodian et al (1999), Yazici (2008) and Baek et al (2009). Carter and Pick (1989) examines the J-curve effect in the US agricultural sector by assuming a 10% depreciation of the dollar and finds that the first segment of the J-curve (deterioration part) exists for the US agricultural trade balance. Doroodian et al (1999) investigates the J-curve hypothesis for both US agricultural and manufacturing sectors using the Shiller lag model and finds J-curve effect in agricultural sector but not in manufacturing. Yazici (2008) examines and compares, using Almon lag technique, the response to exchange rate changes of trade balances with the rest of the world of three Turkish sectors; agriculture, manufacturing and mining. Yazici (2008) finds that in the short-run in response to domestic currency depreciation agricultural trade balance first improves, then worsens and then improves again and in the long-run agricultural trade balance worsens as a result of depreciation of domestic currency. Baek et al (2009) studies the effects of exchange rate changes on the bilateral agricultural trade balance of US with its 15 major trading partners and finds that the exchange rate plays a crucial role in the determination of US bilateral agricultural trade. Among these papers, Yazici (2008) is the closest one to ours in the sense that it also looks at the Turkish agricultural trade balance. …

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