The last 15 years has seen an increase in focus on exchange rate policy, and effects of exchange rates on foreign trade in Turkish economy. A vector autoregression (V AR) model is used to analyse the interrelationships between the exchange rate, exports and imports in both aggregate and sectoral levels during the period 1989:1-1996:12. By the use of VAR,empirical evidences indicate that there is bi-directional causality between exchange rates and exports. Even though there is a close relationship between exports and imports, however, the fact that imports is not responsive to the exchange rate policy. The major conclusion is that there is no strong empirical evidence that exchange rate policy is an effective tool to eliminate the trade imbalances.
Key words: Exchange rate policy, exports, imports and VAR
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