The Determinants of Foreign Trade Deficits Under Floating Exchange Rate Regime: Bounds Test Approach

The purpose of this paper is to investigate fundamental factors affecting foreign trade deficit of Turkey that in the content of fiscal, monetary and exchange rate policies. For this purpose, the effects of real budget deficit, real monetary supply and real effective exchange rate index on real foreign trade deficit are analyzed econometrically by using bounds test by using monthly series belonging to the period of 2001:3- 2009:6 that floating exchange rate regime is implemented. According to the analysis results, foreign trade deficit is positively and statistically significant effected by budget deficit, negatively and statistically significant effected by monetary supply, and posivitely and not statistically significant by real effective exchange rate index in the long run. Furthermore, analysis results in short run show that foreign trade deficit is posivitely and statistically significant effected by monetary supply. Analysis results in short run belonging to budget deficit and real effective exchange rate index are demonstration parallel with the relationship results in long run.