EXCHANGE RATE VOLATILITY AND FOREIGN TRADE: TODA-YAMAMOTO CAUSALITY ANALYSIS FOR TURKEY(2003:M1 – 2017:M11)

The purpose of this study is to test empirically relations between exchange rate volatility and trade in Turkey where the floating exchange rate regime implemented after the 2001 crisis. In the study, a method based on moving average, which is used extensively in the literature, is used to measure the variability or fluctuation in exchange rates. The causal relations between the variable that obtained by this method and foreign trade variables were determined by Toda-Yamamoto causality analysis. According to the empirical findings obtained from the study, two-way causality between exchange rate volatility and import are mentioned while there is a one-way causal relationship from export to exchange rate volatility. There are also different results between the sub-items of export and import and exchange rate volatility. While one-way causality was found from the exchange rate volatility to the import variable of the consumption goods, one-way causality from the other trade variables to the exchange rate volatility was found. Thus, these results obtained in the study, suggesting that the exchange rate volatility can affect Turkey's foreign trade. In this context, reducing the exchange rate volatility or the establishment a stable exchange rate, Turkey's foreign trade could result in a positive impact