Oil prices and trade balance: A wavelet based analysis for Turkey

The conceptuality of the economic literature has been going through an unprecedented change at a rate which is mind boggling since the Great Recession. The breakdown of the DSGE models, the existence of a zero lower bound for a longer period than ever expected, the importance and intriguing ways of nowcasting and heterodox beliefs such as the non-linearity of all the economic variables with measurement errors as the predominant factor that leads to turmoil and even crisis have all been at the forefront of this wave of change that has been offering endless ways to tackle problems which are not even defined in the best possible manner. Moreover, questions surrounding the models used to employ expectation formation of individuals and the shifting focus to company culture rather than just a representative agent have added additional fuel to a debate which seems to be only at its infant stages. Nonetheless, there are still important topics which are simple but left unattended by the literature. Although there are some studies about the effects of oil prices on the macroeconomic performance of nations, the literature on the interaction between oil prices and trade balance is rather limited, especially for oil importing emerging/developing countries. This paper studies the oil price-trade balance relationship in Turkey using the methodology of wavelets. More specifically, continuous wavelet transform, cross wavelet transformation and wavelet coherence are used to unravel time and frequency dependent relationships between oil prices and trade balance. Our preliminary results show that oil prices and the trade balance are positively related and oil prices are leading the trade balance, especially during crisis periods.