THE ANALYSIS OF THE TRADE BALANCE OF TURKEY IN RESPONSE TO OIL PRICE CHANGES

Abstract

This study empirically examines the effects of oil prices on the trade balance of Turkey, which depends heavily on oil imports. Unlike the other studies on this subject, in this study, the relationship between oil prices and trade balance is investigated by regime-dependent impulse response functions and forecast error decompositions based on multivariate Threshold VAR (TVAR) model comparing with linear VAR model. The findings suggest that, the relationship between oil prices and trade balances is non-linear. In the regime of higher oil price volatility, components of trade balance respond stronger to oil price shocks than lower regime and linear VAR model. Oil price increases in the high regime deteriorates the total trade balance, non-oil and non-gas trade balance and intermediate trade balance; on the other hand, consumption trade balance of Turkey is positively affected from oil price increases. Additionally, consumption goods trade balance found to be the mostly affected by oil price shocks according to the impulse-response functions and variance decomposition analysis. Finally, the findings obtained from linear VAR and lowest regime are generally similar and has less effect on the trade balance components.