Effects of Exchange Rate and Interest Rate on Foreign Trade in Turkey: An Analysis with Structural Breaks

In this study; impacts of interest rate and exchange rate on foreign trade in Turkey are investigated by time series analysis with structural breaks for 1989:M01-2018:M06 period. The stationarity of the series is examined by Kapetanios (2005) test, all series are found to be I(1). Cointegration relations between the series are investigated by Maki (2012) test, they are found to be cointegrated. That is, interest rate, exchange rate and foreign trade series of Turkey move together in the long run. Long and short run analyzes are performed by FMOLS method. In long run analysis; it is estimated that the increases in exchange rates increase exports, decrease imports and that the effect of increase in exchange rates on exports is greater than its effect on imports while the effects of increases in interest rates on exports and imports are statistically insignificant. It is seen that the increase in the interest rate decreases the exchange rate. In short run analysis; it is determined that the increases in exchange rates don’t immediately affect exports but reduce imports. Increases in interest rates are seen to have an effect of reducing exchange rates in the short run. Error correction mechanisms of the models operate. The causality relations between the series are examined by Granger test and it is determined that one-way causality from exchange rate to import and two-way causality between interest rate and export and between export and import exist. This situation reveals that the exchange rate is influenced by the monetary policies implemented in Turkey, also that the imports are affected by exchange rate policies