Harberger-Laursen-Metzler Hypothesis: An Analysis with ARDL Bounds Test Approach

Abstract

The Harberger, Laursen, and Metzler (HLM) hypothesis posits that a positive (negative) change in terms of trade, ceteris paribus, will lead to positive (negative) movements in the trade balance. When tested on developing countries, the hypothesis yields varying results. Some studies validate the hypothesis, while others suggest it is not applicable. Additionally, causality tests examining long-term relationships also produce different outcomes. Türkiye ranks among the countries with significant trade deficit issues. Therefore, testing the validity of the HLM hypothesis in the context of Türkiye is of great importance. The motivation of this study is to examine the impact of changes in terms of trade on the long-term trade balance in Türkiye from 2013 to 2023. In this context, both the volume and unit value of the terms of trade are considered. According to the findings, there is a positive relationship from terms of trade to the trade balance. Short-term deviations are found to be corrected within approximately three months. The causality test indicates that terms of trade are a Granger cause of the trade balance, and this causality is unidirectional. In this study, Türkiye's terms of trade and trade balance data for the specified periods were meticulously analyzed, and the validity of the HLM hypothesis was carefully tested. The analysis results provide strong evidence supporting the HLM hypothesis. These findings offer significant insights for Türkiye's economy and trade policies.