The role of real exchange rate in the trade balance between Turkey and Libya: Evidence from nonlinear and wavelet-based approaches

Year 2022, Volume: 4 Issue: 2, 46 - 56, 31.12.2022

Mohamed Alsanusi Halil Altıntaş Mohammed Alnour

https://doi.org/10.58251/ekonomi.1173205

Cited By: 7

Abstract

The time-invariable models would suffer to give a clearer description to the relationship between exchange rate and trade flows. Therefore, the growing strand of literature has failed to reach a consensus. This study aims to contribute to this discussion by employing not only nonlinear model to capture the asymmetric effect, but also to detect the time frequencies and explore the lead-lag relations between real exchange rate and trade balance between Libya and its major trade partner ‘Turkey’ by applying both NARDL and wavelet coherence approaches, using monthly data spanning January 2013 to December 2020, selected based on data availability. The findings disclose that trade balance responds to the real exchange rate asymmetrically. The asymmetric effect is skewed more in the negative direction, as the impact of negative change is significant and greater than the positive change in long run. While the oil price shocks positively impact trade balance, economic policy uncertainty negatively affects trade balance. The wavelet coherence analysis indicates that real exchange rate and economic policy uncertainty are lagging in trade balance, while oil price leads trade balance. Among various other policy suggestions, we recommend that stable exchange rate through the intervention in the foreign exchange market will promote the trade balance at the end.

Keywords

Trade balance, real exchange rate, NARDL, WTC approach, Economic policy uncertainty

The role of real exchange rate in the trade balance between Turkey and Libya: Evidence from nonlinear and wavelet-based approaches

Abstract

The time-invariable models would suffer to give a clearer description to the relationship between exchange rate and trade flows. Therefore, the growing strand of literature has failed to reach a consensus. This study aims to contribute to this discussion by employing not only nonlinear model to capture the asymmetric effect, but also to detect the time frequencies and explore the lead-lag relations between real exchange rate and trade balance between Libya and its major trade partner ‘Turkey’ by applying both NARDL and wavelet coherence approaches, using monthly data spanning January 2013 to December 2020, selected based on data availability. The findings disclose that trade balance responds to the real exchange rate asymmetrically. The asymmetric effect is skewed more in the negative direction, as the impact of negative change is significant and greater than the positive change in long run. While the oil price shocks positively impact trade balance, economic policy uncertainty negatively affects trade balance. The wavelet coherence analysis indicates that real exchange rate and economic policy uncertainty are lagging in trade balance, while oil price leads trade balance. Among various other policy suggestions, we recommend that stable exchange rate through the intervention in the foreign exchange market will promote the trade balance at the end. 

Keywords

Trade balance, Real exchange rate, NARDL, WTC approach, Economic policy uncertainty

References

• Adebayo, T. S. (2020). Revisiting the EKC hypothesis in an emerging market: an application of ARDL-based bounds and wavelet coherence approaches. SN Applied Sciences, 2(12), 1–15. https://doi.org/10.1007/S42452-020-03705-Y/TABLES/8
• Ahad, M., & Anwer, Z. (2019). Asymmetrical relationship between oil price shocks and trade deficit: Evidence from Pakistan. Https://Doi.Org/10.1080/09638199.2019.1655782, 29(2), 163–180. https://doi.org/10.1080/09638199.2019.1655782
• Alessandria, G., & Choi, H. (2021). The dynamics of the U.S. trade balance and real exchange rate: The J curve and trade costs? Journal of International Economics, 132. https://doi.org/10.1016/j.jinteco.2021.103511
• Arize, A. C., Malindretos, J., & Igwe, E. U. (2017a). Do exchange rate changes improve the trade balance: An asymmetric nonlinear cointegration approach. International Review of Economics & Finance, 49(C), 313–326. https://doi.org/10.1016/J.IREF.2017.02.007
• Arize, A. C., Malindretos, J., & Igwe, E. U. (2017b). Do exchange rate changes improve the trade balance: An asymmetric nonlinear cointegration approach. International Review of Economics & Finance, 49, 313–326. https://doi.org/10.1016/J.IREF.2017.02.007
• Arndt, H. W., & Dorrance, G. (1987). The J-Curve. Australian Economic Review, 20(1), 9–19. https://doi.org/10.1111/J.1467-8462.1987.TB00653.X
• Baek, & Jungho. (2020). An asymmetric approach to the oil prices-trade balance nexus: New evidence from bilateral trade between Korea and her 14 trading partners. Economic Analysis and Policy, 68(C), 199–209. https://doi.org/10.1016/J.EAP.2020.09.013
• Bahmani-Oskooee, M., Aftab, M., Bahmani-Oskooee, M., & Aftab, M. (2017). On the asymmetric effects of exchange rate volatility on trade flows: New evidence from US-Malaysia trade at the industry level. Economic Modelling, 63(C), 86–103. https://doi.org/10.1016/J.ECONMOD.2017.02.004
• Bahmani-Oskooee, M., & Arize, A. C. (2021). The effect of exchange rate volatility on U.S. bilateral trade with Africa: A symmetric and asymmetric analysis. Economic Systems, 100879. https://doi.org/10.1016/J.ECOSYS.2021.100879
• Bahmani-Oskooee, M., & Baek, J. (2021). Whose Policy Uncertainty Matters in the Trade between Korea and the U.S.? Journal of Risk and Financial Management 2021, Vol. 14, Page 520, 14(11), 520. https://doi.org/10.3390/JRFM14110520
• Bahmani-Oskooee, M., Bose, N., & Zhang, Y. (2018). Asymmetric Cointegration, Nonlinear ARDL, and the J-Curve: A Bilateral Analysis of China and Its 21 Trading Partners. Https://Doi.Org/10.1080/1540496X.2017.1373337, 54(13), 3130–3150. https://doi.org/10.1080/1540496X.2017.1373337
• Bahmani-Oskooee, M., & Gelan, A. (2018). Exchange-rate volatility and international trade performance: Evidence from 12 African countries. Economic Analysis and Policy, 58, 14–21. https://doi.org/10.1016/j.eap.2017.12.005
• Bahmani-Oskooee, M., Harvey, H., & Halicioglu, F. (2021). Does the real exchange rate play any role in the trade between Mexico and Canada? An asymmetric analysis. Economic Analysis and Policy, 70, 1–21. https://doi.org/10.1016/j.eap.2021.01.020
• Bahmani-Oskooee, M., Harvey, H., & Hegerty, S. W. (2017). The Japanese trade balance and asymmetric effects of yen fluctuations: Evidence using nonlinear methods. The Journal of Economic Asymmetries, 15, 56–63. https://doi.org/10.1016/J.JECA.2017.02.001
• Bahmani-Oskooee, M., & Kanitpong, T. (2021). On the asymmetric effects of exchange rate changes and Thailand’s inpayments from and outpayments to its partners. The Journal of Economic Asymmetries, 24, e00222. https://doi.org/10.1016/J.JECA.2021.E00222
• Bahmani-Oskooee, M., & Karamelikli, H. (2018). Japan-U.S. trade balance at commodity level and asymmetric effects of Yen-Dollar rate. Japan and the World Economy, 48, 1–10. https://doi.org/10.1016/j.japwor.2018.06.002
• Bahmani-Oskooee, M., & Karamelikli, H. (2021a). Asymmetric J-curve: evidence from UK-German commodity trade. Empirica, 48(4), 1029–1081. https://doi.org/10.1007/S10663-021-09502-Z/TABLES/7
• Bahmani-Oskooee, M., & Karamelikli, H. (2021b). The Turkey-US commodity trade and the asymmetric J-curve. Economic Change and Restructuring, 54(4), 943–973. https://doi.org/10.1007/S10644-020-09298-1/FIGURES/1
• Bahmani-Oskooee, M., & Nouira, R. (2021). U.S.-German commodity trade and the J-curve: New evidence from asymmetry analysis. Economic Systems, 45(2). https://doi.org/10.1016/J.ECOSYS.2020.100779
• Bahmani-Oskooee, M., Obaidur Rahman, M., & Abdul Kashem, M. (2018). Macroeconomics and Finance in Emerging Market Economies Bangladesh’s trade partners and the J-curve: an Asymmetry Analysis Bangladesh’s trade partners and the J-curve: an Asymmetry Analysis. https://doi.org/10.1080/17520843.2018.1534873
• Bahmani-Oskooee, M., & Saha, S. (2019). Exchange rate risk and commodity trade between U.S. and India: an asymmetry analysis. Https://Doi.Org/10.1080/13547860.2019.1701307, 25(4), 675–695. https://doi.org/10.1080/13547860.2019.1701307
• Bao, H. H. G., & Le, H. P. (2021). Asymmetric impact of exchange rate on trade between Vietnam and each of EU-27 countries and the UK: evidence from nonlinear ARDL and the role of vehicle currency. Heliyon, 7(6), e07344. https://doi.org/10.1016/J.HELIYON.2021.E07344
• Commer, P. J., Sci, S., Faheem, M., Azali, M., Chin, L., & Mazlan, N. S. (2020). Asymmetric effect of oil price changes on trade balance in Saudi Arabia, Kuwait and United Arab Emirates. Pakistan Journal of Commerce and Social Sciences (PJCSS), 14(3), 685–714. https://www.econstor.eu/handle/10419/224960
• de Grauwe, P., & Paulson, J. (2020). Economics of the monetary union. https://www.google.com/books?hl=en&lr=&id=gY_UDwAAQBAJ&oi=fnd&pg=PP1&dq=De+Grauwe,+P.+(2020).+Economics+of+the+monetary+union.+Oxford+University+Press,+USA.&ots=UJ-hHD7JKi&sig=AXYxOpyG-tg2IgtLNwy-mPSnXjY
• Dogru, T., Isik, C., & Sirakaya-Turk, E. (2019). The balance of trade and exchange rates: Theory and contemporary evidence from tourism. Tourism Management, 74, 12–23. https://doi.org/10.1016/J.TOURMAN.2019.01.014
• Halicioglu, F. (2008). The bilateral J-curve: Turkey versus her 13 trading partners. Journal of Asian Economics, 19(3), 236–243. https://doi.org/10.1016/J.ASIECO.2008.02.006
• Jibril, H., Chaudhuri, K., & Mohaddes, K. (2020). Asymmetric oil prices and trade imbalances: Does the source of the oil shock matter? Energy Policy, 137, 111100. https://doi.org/10.1016/J.ENPOL.2019.111100
• Kodongo, O., & Ojah, K. (2013). Real exchange rates, trade balance and capital flows in Africa. Journal of Economics and Business, 66, 22–46. https://doi.org/10.1016/J.JECONBUS.2012.12.002
• Korhonen, I., & Ledyaeva, S. (2010). Trade linkages and macroeconomic effects of the price of oil. Energy Economics, 32(4), 848–856. https://doi.org/10.1016/J.ENECO.2009.11.005
• Lin, B., & Bai, R. (2021). Oil prices and economic policy uncertainty: Evidence from global, oil importers, and exporters’ perspective. Research in International Business and Finance, 56, 101357. https://doi.org/10.1016/J.RIBAF.2020.101357
• Magee, S. P., Magee, & P., S. (1973). Currency Contracts, Pass-Through, and Devaluation. Brookings Papers on Economic Activity, 4(1), 303–325. https://EconPapers.repec.org/RePEc:bin:bpeajo:v:4:y:1973:i:1973-1:p:303-325
• Nicita, A. (2013). Exchange rates, international trade and trade policies. International Economics, 135–136, 47–61. https://doi.org/10.1016/j.inteco.2013.10.003
• Nkoro, E., & Uko, A. K. (2016). Autoregressive Distributed Lag (ARDL) cointegration technique: application and interpretation. Journal of Statistical and Econometric Methods, 5(4), 63–91.
• Olayungbo, D. O. (2019). Effects of Global Oil Price on Exchange Rate, Trade Balance, and Reserves in Nigeria: A Frequency Domain Causality Approach. Journal of Risk and Financial Management 2019, Vol. 12, Page 43, 12(1), 43. https://doi.org/10.3390/JRFM12010043
• Olayungbo, D., Yinusa, O., & Akinlo, A. (2011). Effects of Exchange Rate Volatility on Trade in Some Selected Sub-Saharan African Countries. Modern Economy, 02(04), 538–545. https://doi.org/10.4236/ME.2011.24059
• Rose, A. K. (2000). One money, one market: The effect of common currencies on trade. Economic Policy, 15(30), 7–46. https://doi.org/10.1111/1468-0327.00056
• Sambo, N. U., Farouq, I. S., Isma’il, M. T., Sambo, N. U., Farouq, I. S., & Isma’il, M. T. (2021). Asymmetric effect of exchange rate volatility on trade balance in Nigeria. National Accounting Review 2021 3:342, 3(3), 342–359. https://doi.org/10.3934/NAR.2021018
• Santana-Gallego, M., & Pérez-Rodríguez, J. v. (2019). International trade, exchange rate regimes, and financial crises. North American Journal of Economics and Finance, 47, 85–95. https://doi.org/10.1016/j.najef.2018.11.009
• Sarlab, R., & Seyed Ameri, M. (2021). The Effect of Exchange Rate Volatility on Trade Balance Sports Sector in Selected Countries in the MENA. Sport Management Studies, 12(64). https://doi.org/10.22089/SMRJ.2020.8573.2930
• Senadza, B., Diaba, D. D., & Delali Diaba, D. (2018). Effect of exchange rate volatility on trade in Sub-Saharan Africa☆. Journal of African Trade, 4(1–2), 20–36. https://doi.org/10.1016/J.JOAT.2017.12.002
• Serenis, D., & Tsounis, N. (2014). Does Exchange Rate Variation Effect African Trade Flows? Procedia Economics and Finance, 14, 565–574. https://doi.org/10.1016/S2212-5671(14)00757-6
• Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework. Festschrift in Honor of Peter Schmidt, 281–314. https://doi.org/10.1007/978-1-4899-8008-3_9
• Tunaer Vural, B. M. (2016). Effect of Real Exchange Rate on Trade Balance: Commodity Level Evidence from Turkish Bilateral Trade Data1. Procedia Economics and Finance, 38, 499–507. https://doi.org/10.1016/s2212-5671(16)30221-0
• Wang, C. H., Lin, C. H. A., & Yang, C. H. (2012). Short-run and long-run effects of exchange rate change on trade balance: Evidence from China and its trading partners. Japan and the World Economy, 24(4), 266–273. https://doi.org/10.1016/j.japwor.2012.07.001
• Wu, P. C., Liu, S. Y., & Pan, S. C. (2013). Nonlinear bilateral trade balance-fundamentals nexus: A panel smooth transition regression approach. International Review of Economics & Finance, 27(C), 318–329. https://doi.org/10.1016/J.IREF.2012.10.010
• Xu, J., Bahmani-Oskooee, M., & Karamelikli, H. (2022). On the asymmetric effects of exchange rate uncertainty on China’s bilateral trade with its major partners. Economic Analysis and Policy, 73, 653–669. https://doi.org/10.1016/J.EAP.2021.12.017
• Yılmaz, S. (2020). Oil Geopolitics of Libya and Turkey. www.ijac.org.uk