An examination of bilateral J-curve: Evidence from Turkey and her 20 major trading partners

There are two methods to determine the impact of real exchange rate on balance of foreign trade. While previous studies, which aim to uncover the nexus between foreign balance and real exchange rate, use foreign trade statistics to measure the volume of foreign trade, some other recent studies utilize bilateral trade statistics. By following current literature, this study draws from the model of Rose and Yellen (1989) and analyzes the relationship between the volume of bilateral foreign trade and bilateral real exchange rate in Turkey and her 20 major trading partners for the period from 1995 to 2015. To this purpose, the presence of cross-sectional dependence among the countries was investigated, and long-term coefficients for each country were obtained with the Mean Group Estimator (MG) method developed by Pesaran and Smith (1995). In conclusion, the findings revealed that bilateral real exchange rate has a statistically significant negative effect on the bilateral foreign trade balance in 10 out of 20 countries in the panel. This negative relationship means that depreciation of the Turkish Lira (TL) against the currency of trading partners improves bilateral foreign balance, and thus, the J-curve effect in these countries is verified. Moreover, Canning and Pedroni (2008) panel causality test results indicate that bilateral real exchange rates cause bilateral foreign trade balance in Turkey with her 14 trading partners.