Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

References

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Appendix A. Modeling Trade Flows Net of Energy and Gold

Energy and gold are often excluded from the analysis of trade flows in Turkey, as they are known to be relatively inelastic with respect to both income and the REER, and gold trade is subject to extraordinary factors (see for example (Aldan, Bozok, and Gunay, 2015), (Çulha and Kalafatçılar, 2014), and (Bozok, Dogan, and Yunculer, 2015)).

As a robustness check, we re-estimate our regressions for real exports, imports, and the trade balance after netting out trade in gold and energy. Regression results show that our findings in the main body of the paper are not driven by idiosyncratic shocks on gold and energy flows.

Table A1.

Long-Run Trade Elasticities of Real Exports Net of Energy and Gold (Lira) in ARDL Model

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Notes: The lag structure is selected automatically based on the AIC and BIC criteria. The Bounds Test F-statistic tests the null hypothesis of no long-run/cointegrating relationship. The Breusch-Godfrey LM statistic tests the null hypothesis of no residual autocorrelation at a given lag. ***p<0.01, **p<0.05, *p<0.1. The long-run specification includes a constant, which is omitted from the regression output. The R2 reported in the table are estimated from the ARDL specification in levels.

As expected, the demand for imports net of gold and energy is much more sensitive to REER changes than the total import demand (Tables 4 and A2). The income elasticities of total imports and its subset are not, however, significantly different. Importantly, misalignments between actual and fundamentals-consistent real, non-gold, non-energy imports are closed up to 3 times faster than those for total imports.

Table A2.

Long-Run Trade Elasticities of Real Imports Net of Energy and Gold (USD) in ARDL Model

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Notes: The lag structure is selected automatically based on the AIC and BIC criteria. The Bounds Test F-statistic tests the null hypothesis of no long-run/cointegrating relationship. The Breusch-Godfrey LM statistic tests the null hypothesis of no residual autocorrelation at a given lag. ***p<0.01, **p<0.05, *p<0.1. The long-run specification includes a constant, which is omitted from the regression output. The R2 reported in the table are estimated from the ARDL specification in levels.

Appendix B. Data Sources

B.1. Construction of Trade-Weighted Indexes of Relative Prices and Foreign Income

CBRT published data on the consumption-based real effective exchange rate (CPI-based REER) starting in 2003. In this paper, we backcast the pre-2003 levels of the CPI-based REER, in such a way that the quarter-on same quarter of previous year gross growth rates are given by:

REERt=REERt4i=1N[CPIt,TURCPIt,i×ei,tCPIt4,TURCPIt4,i×et4,i]wi,
  • et,i — nominal bilateral exchange rate with country i at time t, defined as Turkish Liras per one unit of foreign currency,

  • CPIt,i — consumer price index in country i at time t and CPIt,TUR is the CPI in Turkey,

  • i = 1,…,N — top 20 trade partners for both imports and exports to/from Turkey: Germany, United Kingdom, Iraq, Italy, USA, France, UAE, Spain, Iran, Netherlands, Saudi Arabia, Israel, Egypt, Switzerland, Romania, Poland, Belgium, Bulgaria, China, Algeria. Russia is not included in the list despite being the biggest source of imports to Turkey, because trade is mostly in energy. Energy prices are quoted in US dollars on international markets, so trade flows are little affected by the relative prices and incomes in Turkey and Russia,

  • wi — the weights are given by the combined shares of the top 20 partners in Turkey’s exports and imports averaged over a ten-year period 2007–17. Directions of trade data is from Turkey’s Statistical Institute (TurkStat).

The bilateral exchange rates of the Turkish Lira vis-a-vis the currencies of trade partners other than the US are obtained from the respective US dollar cross-rates. The source data for the CPI and real GDP series are local currency-based and seasonally adjusted.

Before constructing the index of foreign income, we transform the real GDP series of trade partners in their local currencies to a common base year 2009.11 We then convert all series into constant 2009 US dollars, by dividing the local currency real GDP of each trade partner by the respective average nominal exchange rate vis-a-vis the US dollar (defined as local currency units per one US dollar) in 2009. The trade-weighted index of foreign GDP is then calculated as the weighted average.12

For trade partners for which CPI and/or GDP data are not available on quarterly basis, we map IMF World Economic Outlook (WEO) annual data into quarterly values, by assuming zero quarter-on-quarter growth rates within each year. We use the following sources for quarterly data:

Iraq

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United Arab Emirates(UAE)

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Iran

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Saudi Arabia

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Egypt

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Algeria

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B.2. Real Exports and Imports Series

Turkey’s real exports and imports data are from Turkey Statistical Institute. The original exports and imports data are in chain-linked Turkish Lira (reference year = 2009)(i.e., expressed in domestic consumer goods baskets) and include both goods and services. In the paper, we use exports data in Lira and imports data in USD. We transform the real imports data from Lira to USD using the identity:

M=M˜/Q
  • M — real imports in chain-linked Turkish Lira (reference year = 2009) (i.e., expressed in domestic consumer goods baskets),

  • M˜ — real imports in foreign currency (i.e., expressed in foreign consumer goods baskets),

  • Q′ — CPI-based real effective exchange rate(REER).

We construct measures of the real trade balance excluding gold and energy, by first constructing series for real exports and imports of these commodities. Nominal amounts in US dollars are available from Turkey Statistical Institute trade data. We convert them to chain-linked US dollars by using Fund staff estimates of the respective deflators.

1

The bulk of the work on this project was carried out during Xuan Fei’s summer internship at the European Department of the International Monetary Fund in 2017. It was overseen by Antonio Spilimbergo, who provided valuable feedback and guidance. We would also want to thank Francesca Caselli, Alexander Culiuc, Daniel Leigh, Donal McGettigan, Fah Jirasavetakul, and IMF European Department seminar participants for helpful comments. Jingzhou Meng provided excellent research assistance. All remaining errors are our own.

1

The data sample used in the paper ends in 2017, as the empirical analysis was carried out in the summer of 2017 and finalized by mid-2018.

2

For simplicity, we derive the main relationships in the model for the special case of one trade partner. See Appendix B.1 for the general formula of the REER used in the empirical part of the paper.

3

Starting from (TB < 0), a narrowing of the deficit in levels (dTBdt>0) implies a negative growth rate of the real trade balance (tb˙=dTBdt1TB<0).

4

Krugman (1989) derived equation (8) in the special case, in which the initial real trade balance is zero (see Hooper, Johnson, and Marquez (2002) for a correction to the published formula).

5

The starting year of the sample is determined by the availability of the revised GDP data published by Turk-Stat. The sample ends in 2017, as the empirical analysis was carried out in the summer of 2017 and finalized by mid-2018.

6

We also estimate a model of Turkey’s real trade balance to GDP ratio, in which the income variable is the ratio between domestic and foreign real incomes.

7

It is the existence of this correction mechanism that ensures that the dynamic adjustment of real trade flows will eventually bring them to their long-run steady states.

8

Here, lnREER+ and lnREER- are the partial sum processes of positive and negative changes of lnREER. The details of the variable’s constructions are in Equation (14).

9

The high exchange rate pass-through into import prices in Turkey could be explained by dollar dominance in trade invoicing (Gopinath, 2015). Only 3% of Turkish imports are invoiced in Lira.

10

In the economic literature, the J-curve effect is often attributed to rigidities (e.g., non-negotiable, pre-existing trade contracts) preventing the adjustment in volumes of imports and exports in the short-run, whereas in the long-run prices adjust and the real trade deficit improves.

11

2009 is the base year for the chain-indexed, real GDP data for Turkey.

12

We use algebraic mean, because in contrast to REER, the real GDP series are expressed in common units and are comparable across countries of trade partners’ real GDP (in constant 2009 US dollars).