CHAPTER 11

EXPORTS, IMPORTS, AND THE

EXCHANGE RATE: A CAUSALITY
ANALYSIS FOR TURKEY (2004–2017)
Erdoğan Kotil

ABSTRACT
The exchange rate has been an important topic in the Turkish Economy for
many years. It affects prices with exchange rate pass-through. The aim of
this chapter is to analyze the dual relationship between exports and imports,
exports and the exchange rate, imports and the exchange rate by using time
series analysis. The results indicate that there is only one causal relationship
between exports and imports. The direction is from imports to exports.
Keywords: Imports; exports; real exchange rate; causality; economic
growth; vecm model

1. INTRODUCTION
The exchange rate, which is the value of a national currency against other curren-
cies, is important for all countries. Exchange rate provides links between local and
international markets for goods, services, and various financial assets. Change in
exchange rates may affect actual inflation and expectations of future price move-
ments. The effect of the exchange rate on foreign trade may change the coun-
try’s foreign trade competitiveness and, in addition, the country’s external debt.
Countries have options between fixed and fully flexible regimes for determining
the exchange rate. The choice of exchange rate regime depends on the objectives
for the country’s aims (Krugman & Obstfeld, 2006).

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Contemporary Studies in Economic and Financial Analysis, Volume 101, 163–170
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164 ERDOĞAN KOTIL

The Bretton Woods fixed exchange rate system introduced after the Second
World War and continued until 1971. It was a period when local currencies were
fixed to the US dollar and stability in exchange rates was achieved. The exchange
rate systems applied by countries differed with the end of the Bretton Woods
system. Some countries have switched to floating exchange rates, others have
remained in a fixed exchange rate system, and some have preferred intermediate
regimes.
Turkey implemented a fixed exchange rate regime until the 1980s. This regime
was carried out by determining the national currency value by the central bank
and keeping it constant. Turkey abandoned the fixed exchange rate regime in the
1980s and passed to a floating exchange rate regime.
Exchange rates are determined by the supply and demand conditions in the
market in the floating exchange rate regime. The floating exchange rate regime
has different applications.
After 1980 Turkey applied a form of floating exchange rate regime, named
crawling bands and dirty float. Turkey implemented dirty float since 2001. In this
system, the central bank intervenes through buying and selling foreign exchange
in case of excessive volatility in exchange rates. The exchange rate is determined
depending on market supply and demand in a floating exchange rate system. The
size of the demand for foreign currency determined by the importation of goods
and services in the country, tourism expenditures, demand for foreign financial
assets, and foreign investment demand of citizens (Devereux & Engel, 1998).
In this study, the relationship between the exchange rate and foreign trade in
Turkey will be examined. US dollars are widely used in Turkey. An indicator of
this is that the US Dollar constitutes approximately 65% of the foreign currency
deposits. Therefore, US dollar/Turkish Lira (TL) exchange rate was used. The
post-2004 period, when the implementation results of the Transition to a Strong
Economy Program implemented after the 2001 crisis was observed, constitute
the source of the data of the study. The main purpose of the study is to investigate
the direction of the exchange rate, imports and exports relationship, and to evalu-
ate whether it meets the expectations.

2. EXCHANGE RATE, IMPORTS, AND EXPORTS

RELATIONSHIP
The exchange rate is the value of a national currency against other currencies.
The nominal exchange rate does not consider price differences between countries.
When evaluating foreign trade, the real exchange rate should be used. The differ-
ence between domestic and external inflation rates refers to the real exchange rate
in national currency (Öztürk, 2011). In this study, the real exchange rate is used.
There is a close relationship between changes in exchange rates and the
number of exports. The increase in foreign exchange rates may increase exports by
increasing the country’s external competitiveness. The realization of this situation is
closely related to the supply and demand elasticities of exports goods. If this elasticity
is high, exports may increase both in volume and in value. When the monthly data
Exports, Imports, and the Exchange Rate 165

400

350

300

250

200

150

100

50
2004.1
2004.6
2004.11
2005.4
2005.9
2006.2
2006.7
2006.12
2007.5
2007.10
2008.3
2008.8
2009.1
2009.6
2009.11
2010.4
2010.9
2011.2
2011.7
2011.12
2012.5
2012.10
2013.3
2013.8
2014.1
2014.6
2014.11
2015.4
2015.9
2016.2
2016.7
2016.12
2017.5
2017.10
Import index Reel exchange rate Export index

Fig. 1:  Imports, Exports, and Exchange Rate Relationship.

of 2004–2017 period is examined, the correlation coefficient between exports and

exchange rate was found to be −0.38.
The low exchange rate increases the demand for foreign goods by decreasing
the prices of foreign goods for the country. It is expected that there will be an
inverse relationship between imports and exchange rates. The effect of exchange
rates on imports and exports leads to the presence of foreign trade deficit or sur-
plus. When the monthly data of the period 2004–2017 is analyzed, the correlation
coefficient between imports and exchange rate was found to be −0.30.
The relationship between variables which were taken from The Central Bank
of the Republic of Turkey and Turkey Statistical Institute was shown in Fig. 1.
It is observed that the impact of the implementation of the Transition to a Strong
Economy Program has been positive on imports and exports since 2004. Imports
and exports decreased with the impact of the global crisis until 2010.
The correlation coefficient between imports and exports is 0.96 for the whole
period. This coefficient confirms the existence of a strong relationship between
imports and exports. Imports and exports increased by 230% during the period.
Real exchange rate decreased by 20% in the same period.

3. LITERATURE
There are many studies examining the relationship between exchange rate and
foreign trade. These studies do not reveal a common result. Different findings
have been reported in studies conducted for different countries.
For example; Ethier (1973), Hooper and Kohlhagen (1978), Kumar and
Dhawan (1991), Gagnon (1993), Broll (1994), Caporale and Doroodian (1994),
Wolf (1995), and Rose (2000) have shown that the exchange rate had a negative
impact on foreign trade. De Grauwe (1988), Franke (1991), Grobar (1993), and
Dewlin (2001) showed that the exchange rate change will increase trade. Kroner
166 ERDOĞAN KOTIL

and Lastrapes (1993), McKenzie and Brooks (1998), and Aristotelous (2001)
found no relationship between exchange rate and trade volume.
Studies conducted for Turkey have reached the conclusion that there is no cau-
sality, unidirectional, or bidirectional relationship between variables. Sekmen and
Saribas (2007) found the bi-directional causality between exports and imports
using 1998–2006 data. Yıldırım and Kesikoğlu (2012) found a bi-directional cau-
sality between exports and imports in their study with monthly data between 2003
and 2011 and found no relationship between exchange rate, exports, and imports.
Tapşın and Karabulut (2013) found one-way causality from imports to exports
and they found one-way causality from real exchange rates to imports for the
1980–2011 period. Aytaç and Akduğan (2014) found a bidirectional relationship
between imports, exports and exchange rate. They also found one-way causality
between exchange rate and exports using 2001–2011 monthly data. Korkmaz et al.
(2015) used real exchange rate, imports, and exports data covering the 2003–2013
period. According to the results of the Granger causality test in their study, they
found that imports and exports were the cause of the exchange rate and imports
were the cause of exports. Kargı (2014) showed that there was a Granger causal-
ity relation from the foreign exchange rate to foreign trade using monthly data
from 1992 to 2014. Uğurca and Sağlam (2017) found no relationship between
the real exchange rate, exports and imports using monthly data from 2010 to
2017. Yurtoğlu (2017) did not find a relationship between real exchange rate and
exports using 1997–2015 monthly data.

4. DATA AND RESEARCH METHOD

Imports, exports, and real exchange rate data used in this study are taken from
the Turkish Statistical Institute and the Central Bank of the Republic of Turkey.
In the study, monthly imports, exports, and real exchange rate variables were used
covering 2004:01–2017:12 period.
In order to obtain econometric significance between variables, the series should
be tested for stationary. If there is a tendency in the time series of variables, the
relationship may appear as a false regression rather than the actual one. Therefore,
when the regression refers to a real relationship or a misleading relationship, it is
about whether the series data are stationary or not (Tari, 2010). Therefore, it is
necessary to investigate the stability of the three variables to be used in Granger
causality analysis. If the data are not stationary, it must be stagnated.
In this study, Granger (1969) causality test will be used to test the direction of
causality between foreign trade and real exchange rate. There are three different
situations in Granger Causality Tests. These are:

• One-way causality: In a single equation model such as Y = f(X), Y is the

dependent variable and X is the independent variable. A causality relationship
is here from X to Y (X→Y). The independent variable is in the causal position
and it creates a resulting effect on the dependent variable. This constitutes a
Exports, Imports, and the Exchange Rate 167

one-way result and shows the existence of one-way causality relationship. The
relationship can be written as (X→Y).
• Bi-directional causality: A mutual influence may be between variables shown
as (X↔Y).
• These two variables should not affect each other, in other words, the variables
are independent of each other (Yılmaz, 2005).

5. EMPIRICAL ANALYSIS AND THE RESULTS

We converted all data to logarithm for analysis. Then, the time series properties of
the data are examined using the Augmented Dickey and Fuller (ADF) (1979). The
ADF test results are shown in Table 1.
First differences of all variables reflect that it became stationary.
The Granger Causality Test is made for determining the direction of the rela-
tionship between the reel exchange rate and foreign trade. We used three lags
based on the Akaike information criterion. The analysis results are shown in
Table 2.

Table 1.  ADF Unit Root Test Results.

Variables t-Statistic Probability Order of Integration

Log (exports) −2.937518** 0.0433 I (1)

Log (imports) −3.332501** 0.0150 I (1)
Log (real exchange rate) −9.536878* 0.0000 I (1)

*, ** Rejection of the null hypothesis of unit roots for the ADF tests at the 1% and 5% significance level.

Table 2.  Granger Causality Test Results.

Null Hypothesis Lag

1 2 3 4 6 8 12 18

DEX does not Granger 0.10 0.42 0.54 0.60 0.47 0.77 100.11 0.99
Cause DFX
DLFX does not Granger 0.40 0.16 0.75 0.414 114.15 169.38 0.85 0.90
Cause DEX
DIM does not Granger 0.78 0.69 0.28 0.93 0.39 0.28 0.70 0.81
Cause DLFX
DLFX does not Granger 0.68 144.90 160.17 0.30 0.79 140.52 122.64 0.88
Cause DIM
DIM does not Granger 91144* 64607* 83556* 0.0001* 41535* 32834* 21183* 237.56*
Cause DEX
DEX does not Granger 0.34 0.40 0.52 0.78 124.16 119.86 113.16 128.81
Cause DIM

IMP, imports; EXP, exports; FX, real exchange rate.

*Significance at 1%.
168 ERDOĞAN KOTIL

Table 3.  Unrestricted Cointegration Rank Test.

Hypothesized Eigen Max-Eigen 0.05 Critical Probability Trace 0.05 Critical Probability
No. of CE(s) Value Value Value Statistic Value

None* 0.219585 40.41249ƚ 25.82321 0.0003 55.91176* 42.91525 0.0016

At most 1 0.06727 11.35127 19.38704 0.4778 15.49927 25.87211 0.5333
At most 2 0.025127 4.148006 12.51798 0.7206 4.148006 12.51798 0.7206

*Trace test indicates 1 cointegrating eqn(s) at the 0.05 level.

*Rejection of the hypothesis at the 0.05 level.
ƚ
Rejection of the hypothesis at the 0.05 level.

Table 4.  VECM–based Granger Causality Test Results.

Dependent Exports Imports FX
Variable

Independent variable Imports 6.3619* Exports 1.1202 Exports 1.4419

FX 2.5881** FX 4.7257* Imports 1.9628

* and ** at 1% and 5% significance levels.

Granger causality tests are performed for three lags, and it is observed that
imports have a significant effect on exports. As we have found in the ADF test, all
of the data is stationary at the first level. This shows the possibility of cointegra-
tion. Johansen Cointegration test was performed to test this situation.
Trace and Maximum Eigenvalue test results, which determine the number of
cointegration vectors, indicate the existence of one cointegration relationship
between the variables (Table 3).
Cointegration results suggest that in the long run, there is an equilibrium
between three variables. In the next step Vector Error Correction Model (VECM)
is estimated. In the short run error correction speed (ECt−1) is 2.6% and statistically
significant. The results obtained in the Granger Causality test were also reached in
the causality test based on VECM. The results are shown in Table 4.

6. SUMMARY AND CONCLUDING REMARKS

Theoretically, expected exchange rate is the main determinant of exports and
imports. It is expected that the appreciation of the exchange rate increases imports
and decreases exports, while the depreciation of the exchange rate decreases
imports and increases exports. According to similar practices in different coun-
tries, the causality between the three variables mentioned in the study was handled
in different ways and different results emerged. Factors such as the competitive-
ness of the countries, net importer or net exports positions, different exchange
rate system practices, foreign trade policies, and exchange rate pass-through may
be factors affecting these results. The effect of exchange rate changes on imports
and exports of countries may occur at different levels.
Exports, Imports, and the Exchange Rate 169

Turkey is a net importer country after passing to free-market practices with

24 January 1980 Stability Measures. According to 2017 data, imports of inter-
mediate goods, main energy, are at a level of 73% of total imports. (It was calcu-
lated by the author using TURKSTAT data.) This rate causes more amounts of
imports than exports and causes the deficit.
The findings of the analysis support this situation. When Granger causality tests
are performed for three lags, it is observed that imports have a significant effect on
exports in all lags. We obtained the same results by VECM-Based Granger Causality
Test Result. Imports and the foreign exchange rate has an effect on exports, and the
foreign exchange rate has a positive effect on imports.
Turkey needs exports for economic growth and exports highly depend on
imports. Increasing in exchange rate causes an increase in production cost and
hence leading to high inflation. Our analysis reveals that the exchange rate is not
an explanatory variable for exports and imports.

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