Foreign Trade and Hysteresis Effect: An Essay on Foreign Trade Flows in the Turkish Economy

Abstract

There is a wide literature that temporary shocks in real exchange rates and volatility will cause structural breaks in foreign trade. As a result of temporary shocks in real exchange rates, the real exchange rate elasticity of imports decreases. The decrease in the sensitivity of the import volume to real exchange rates and the failure to return to its former levels after the temporary shock is expressed as the hysteresis situation. In case the exchange rates return to their previous levels after the temporary shock, the main dynamic of hysteresis is that the firms exhibit the behavior of staying in the market due to sunk costs. In the study, foreign trade flows in the Turkish economy were analyzed for the period 2003Q1-2021Q2 by using the asymmetry hypothesis in order to test the hysteresis effects. According to the findings obtained from the asymmetry hypothesis, the absence of a decrease in the import volume during the period of depreciation of the domestic currency indicates the existence of the hysteresis effect. The fact that the firms exhibited the behavior of staying in the market in exchange rate depreciation in the Turkish economy means that sunk costs are extremely effective in hysteresis. Based on this information, as a solution to the hysteresis effects in foreign trade flows in the Turkish economy at the point of policymaking, reducing the sunk costs in market entry to reasonable levels and ensuring stability in exchange rates come to the fore as suggestions in terms of hysteresis.