RELATIONSHIP BETWEEN INFLATION AND FOREIGN TRADE: AN ECONOMETRIC ANALYSIS WITH STRUCTURAL BREAK BETWEEN THE EU-28 COUNTRIES AND TURKEY

Abstract

Inflation, which indicates the continuous increase in the general level of prices, affects many macroeconomic indicators, especially foreign trade. In the study, the relationship between foreign trade and inflation was analyzed using structural break time series method based on the monthly data obtained from models covering the period 2005: 01 to 2017:12 between Turkey and the EU 28. In the analyzes, the cointegration relationship with structural breaks is found between exports and inflation. However, there isn’t any cointegration relationship between imports and inflation. Moreover, there is a two-way causality relationship between exports and inflation. On the other hand, there is a one-way causality relationship from imports to inflation. There is no causality relationship from inflation to imports. Based on the findings of the study policy proposals were made related to the process of the EU full membership of Turkey.