Asymmetric cointegration and the J-curve: evidence from commodity trade between Turkey and EU
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Asymmetric cointegration and the J‑curve: evidence from commodity trade between Turkey and EU Mohsen Bahmani‑Oskooee1 · Nazif Durmaz2
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract In this paper, we assess the asymmetric effects of exchange rate changes on the trade balance of 57 industries that trade between Turkey and EU. Since the analysis introduces nonlinear adjustment of the exchange rate, we find results that are different than previous research. More precisely, we find short-run asymmetry effects in all industries, short run adjustment asymmetry in 24 industries, short-run impact asymmetry in 17 industries, and long-run asymmetry effects in 23 industries. Small and large industries seem to be subject to the same asymmetry effects. Keywords Asymmetric cointegration · Nonlinear ARDL · Turkish-EU trade · Industry data · J-curve JEL Classification F14 · F31
1 Introduction Due to adjustment lags such as recognition lags, production lags, delivery lags, etc. the trade balance is said to respond to exchange rate changes with lags too, implying that if a country devalues its currency or allows it to depreciate, improvement in the trade balance is not instantaneous. In the short-run, the trade balance will continue
* Mohsen Bahmani‑Oskooee [email protected] Nazif Durmaz [email protected] 1
The Center for Research in International Economics, Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, USA
2
School of Business Administration, University of Huston-Victoria, Katy, TX 77479, USA
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to deteriorate until not only the lags are realized, but also the new contracts at new prices kick in. Then, the trade balance may improve after the passage of some time or perhaps in the long run, hence the J-curve phenomenon.1 Since the introduction of the error-correction modeling and cointegration techniques, the J-curve concept has received a renewed attention. So much attention that each country now has its own literature, and Turkey, our country of concern is no exception. As the review of the literature in the next section reveals, no study has looked at the asymmetric effects of exchange rate changes on the Turkish trade balance at the commodity level. We enter into this new direction in this paper by disaggregating Turkey’s trade flows by industry and consider the trade balance of 57 industries that trade between Turkey and the European Union (EU). Due to its close proximity to the EU region, Turkey enjoys a close economic tie with the EU and the euro being a major and reserve currency can induce the lira-euro rate to play a major role.
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