SHORT-RUN AND LONG-RUN DYNAMICS OF TRADE BALANCE: TESTING FOR THE VALIDITY OF MARSHALL-LERNER CONDITION AND J-CURVE HYPOTHESIS IN TURKEY

Growing trade deficit has been one of the major problems of the Turkish economy to date. This study aims to provide empirical insights to policy makers about whether real depreciation or devaluation of Turkish Lira is an effective way of improving the trade deficit. The data employed in this study is quarterly and covers the period of 1987:1 and 2013:3. Recently developed Bounds test to cointegration approach based on Auto Regressive Distributed Lag Model (ARDL) and Error Correction of ARDL model are employed. According to the Bounds testing, at %10 significance level, there is found an evidence for long run relationship among the variables which are trade balance, domestic income, foreign income and real exchange rate. Additionally, estimated long run ARDL model approved the validity of Marshall-Lerner condition in Turkish economy. Finally, short term dynamics obtained from the estimation of error correction model showed that there is no J-Curve effect for the case of Turkey