Business cycles and cyclical behaviour of trade flows in Turkey

Abstract

Turkey has a strongly countercyclical trade balance like other emerging market economies. De Bock (2010) claims that the procyclical behavior of capital good imports is an important factor driving the countercyclicality of the trade balance in emerging economies. This paper, following De Bock (2010), documents and analyzes the composition and cyclical properties of the trade balance in Turkey. The analysis of Turkish data shows that capital good imports are a sizable fraction of total imports and they are procyclical as in other emerging markets. Based on this observation, a two sector small open economy model, calibrated to Turkish data, is used to quantitatively analyze the role of import structure in driving the cyclical properties of the trade balance, as well as other business cycle properties. The model is able to generate a strongly countercyclical trade balance and also match the major business cycle regularities in the data.