Devaluation as a balance of payments corrective measure in Turkey

Abstract

The main purpose of this study is to examine emiprically whether or not devaluation could be relied upon as a means fo r correcting the balance of payments deficits in Turkey. The time period is the years between 1968-1984. In this study, an international trade model for Turkey is established to find out price and income elasticities of import and export demands. Restricted form of Marshal 1-Lerner condition (Harberger condition) is applied to see the effectiveness of devaluation. Import and export demands functions are estimated by both Ordinary Least Square and Two Stage Least Square methods to see how Turkey's case fits into the methodological controversy. Another issue considered is the choice between static and dynamic formulations of the export and import functions. It is found that import demand of Turkey is income elastic but price inelastic, whereas export demand for Turkey is elastic both w ith respect to the relative prices and income. Devaluation con be used as an effective tool in correcting the balance of payments in Turkey according to the study’s findings.