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The bilateral J-Curve hypothesis between Turkey and her 9 trading partners

Kimbugwe, Hassan (2006): The bilateral J-Curve hypothesis between Turkey and her 9 trading partners.

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Abstract

Applying ARDL Cointegration, Johansen modelling and generalised impulse response function analyses in this paper, we provide new evidence for the Turkish Bilateral J-curve hypothesis in the short and long-run using both annual aggregated and disaggregated data over 1960 and 2000 period between Turkey and 9 of her major trading partners. We adopt a model that models the real trade balance directly as a function of real exchange rate and real domestic and foreign incomes to test for existence of any cointegration relationship and J-curve pattern. We apply the impulse response function analysis to determine whether shocks to real exchange rate induce the trade balance to follow the J-curve pattern. The results indicate that there is cointegration relationship between the above variables. We were unable to find any support for Turkish bilateral J-Curve hypothesis. However the generalised impulse response functions reveal that in some cases depreciation of the Turkish lira seems to improve the trade balance beyond the equilibrium level in the long-run.

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