Marshall-lerner condition analysis: Turkey case

Abstract

Marshall-Lerner (ML) condition is a phenomenon that describes increase in net exports through depreciation of domestic currency. When the sum of export and import elasticities are greater than unity, the ML condition states that a deficit in the trade balance may be improved through currency depreciation at least in a long run. The aim of this study is to find whether the ML condition can be applied to Turkey. In this regard, price and income elasticities of export and import demands in Turkey and its most important bilateral trade partner Germany were studied for the period from January, 2010 to December, 2014. ARDL method was used to investigate a long-term co-integration relationship among the variables. Findings of this study support the applicability of the ML condition indicating that the sum of export and import price elasticities is higher than unity. The depreciation of domestic currency does indeed improve the trade balance of Turkey in a long run.