Abstract
The objective of this study is to investigate Turkey’s trade deficit through examining the dynamics of trade balance in order to understand which of the variables deteriorate this deficit and also in what manner these variables affect trade balance. In this respect, the real exchange rate effect on trade balance both in the short run and long run has been examined by using quarterly data set from 1992 to 2011 for Turkey. The Vector Error Correction Model (VECM) is applied with Johansen co-integration analysis, Granger causality test and generalized impulse response analysis. According to Johansen cointegration analysis, under trace and maximum eigenvalue tests variables found cointegrated which means there is long run relationship among variables. This result enables us to apply VECM.
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