The Effect of Exchange Rate Volatility on Import Demand: Evidence from Turkey

Since 2001 financial crisis, Turkey has adopted fluctuating exchange rate regime in order to make the economy stronger against external shocks. This has lead to a high volatility of Turkish lira against to foreign currencies. Therefore, it became essential for policy makers to evaluate the potential effects of exchange rate volatility on international trade. The purpose of this study is to provide new evidence on the effects of exchange rate volatility on the import demand of Turkey along with income and price elasticities. Our data cover the period 2010:01 to 2010:05. We, initially, employed a GARCH model to evaluate exchange rate volatility one of the independent variables that estimate real import. The study also includes conventional determinants such as relative price level of imports and real GDP. Afterwards, our paper investigates long-run and short-run relationship between real imports and its determinants by using ARDL error correction model. The empirical results indicate that real exchange rate volatility of local currency has significant and reverse effect on import demand. Keywords: Exchange rate volatility, Import demand, GARCH model, ARDL error correction model, Turkey