The Impact of Real Effective Exchange Rate Volatility on the Trade between the U.S. and Turkey: An ARDL Approach

Abstract

This paper analyses the relationship between the trade volume and the volatility of the real effective exchange rate for the case of the U.S. and Turkey. The exchange rate volatility is modeled as a GARCH(1,1) process. We employ the popular ARDL bounds testing approach to investigate the existence of a long-run relationship. Unlike most other studies, this paper uses disaggregated monthly data from ten major industries, to make the identification of industry specific effects possible. We find that in 18 out of 20 cases, the volatility of the real effective exchange rate is an insignificant regressor in the long run. Exports from Turkey to the U.S. mostly depend on the real effective exchange rate, imports to Turkey from the U.S., on the other hand, depend mostly on the Turkish industrial production index. The results of the bounds test confirm the ambiguity of the findings of previous studies.