Impacts of realized volatility of oil price over foreign trade related activities in Turkey

Since 1973 oil crises, especially, small open economies have considered sudden and highly volatile movements in currencies and current account deficits. Oil prices have been breaking new historical price records since second quarter of 2014, especially from last quarter of 2015 to first quarter of 2016, which have gradually put pressure on political, geographical, and currencies risks in the Middle East and Eastern European countries. Similarly, because Turkish economy has been experienced serious current account deficit problems especially since 2002, the effect of decline in oil prices and increased volatility has been worth of investigating. For 2003M1–2015M7 period, export–import ratio, real exchange rate index, realized volatility in oil prices calculated based on monthly OPEC basket price, industrial production index, and consumer price index were collected to analyze these effects and causality relationship among these variables. Test results of unit root test with and without structural break, ARDL bound test and co-integration test were sorted out among variables. Initial result is that price volatility increases and total import decreases more sharply than total export after the decline in oil prices; thus, export–import ratio increases. Another is that there is a negative relationship between real exchange rate index and export–import ratio for real economy because of low oil substituents. As expected, inflation has an adverse effect on foreign trade ratio. Consequently, because of lower pressure of energy-induced inflation, economy policy makers will have some ability to change their priorities from inflation issue to other structural problems.