Does the J-Curve Effect Apply to Turkey's Trade Balance
Zikun Xu
Co-Presenters: Individual Presentation
College: College of Business and Public Management
Major: Finance
Faculty Research Mentor: Nazif Durmaz
Abstract:
This study examines the asymmetric J-curve hypothesis within various Turkish service industries, utilizing both linear and nonlinear models to explore the presence and nature of J-curve effects. Testing revealed two J-curve effects and one inverse. We also found support for 4 asymmetric J-curve patterns and only 1 inverse.we adopt an indicator of domestic economic activity, an indicator of the world’s economic activity, and an indicator of relative prices such as real effective exchange rate while creating the trade balance among a service industry. Therefore, we apply their framework, conducting a similar analysis with Turkish data. Our analysis starts with the following long-run trade balance model:InTBit = a + bLnYTURK + cYW+ dLnEXR (1)In Equation (1), TBi is the trade balance of Turkey of service i. As the model uses a logarithmic form, the trade balance is defined as the ratio of Turkish imports of service i from the world to Turkish exports of the same service i to the world. In this equation, EXR stands for the real effective exchange rate of the Turkish Lira. From a point of construction, a decrease in EXR, indicating a depreciation of the Lira, is expected to lead to a long-term improvement in the trade balance. As a result, the coefficient d is anticipated to be positive. Other factors affecting the trade balance include the level of economic activity in Turkey (YTURK) and the level of global economic activity (YW). Higher domestic economic activity is expected to stimulate trade in the service sector, so the coefficient b is likely to be positive, and c is likely to be negative.