Exchange rate volatility and Turkey-Germany bilateral trade: An asymmetry analysis

Abstract

This study investigates the asymmetric effect of exchange rate volatilities on Turkey’s bilateral trade with Germany over the period between 2002:1 and 2020:2. This study uses the Markov Regime Switching model to analysis the effect of the real exchange rate changes on the bilateral trade volume of Turkey with Germany throughout the periods of expansion and contraction in the trade volume. The results obtained reveal that the changes in real exchange rate have positive impact on the bilateral trade balance in the expansion period, despite there is no statistically significant evidence in the contraction period. This study also concludes the J-curve is valid in Turkey and Germany's bilateral trade relations because of the export-boosting effect of the real exchange rate in the expansion period.

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