The analysis of turkey’s trade balance in response to oil price changes

Abstract

If authorities can get the right signals against oil price volatility, it will be possible to manage the real effects on economic performance with efficient policies. Therefore, especially for the economies dependent on oil imports and oil related raw materials, such as Turkey, analysing the impacts of the oil price shocks on the macroeconomic variables has a crucial importance. This study conducted in this context, empirically examines effects of oil prices on the trade balance of Turkey, which depends heavily on oil imports. Unlike 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. Two regimes are determined by high and low oil price volatility. The findings suggest that, the relationship between oil prices and trade balances is non-linear. In the high regime, components of trade balance respond stronger to oil price shocks than lower regime and linear VAR model. Oil price shocks in the high regime deteriorates the total trade balance, non-oil and non-gas trade balance and intermediate trade balance of Turkey. However, on the other hand, consumption trade balance of Turkey is positively affected from oil price increases. Furthermore, 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.