Capital mobility and foreign debt sustainabilty: some evidence from Turkey

Abstract

This paper address the extent of capital mobility and foreign debt sustainability in Turkey over the 1962–2003 period by examining the relationship between saving and investment, and imports and exports, respectively. The empirical investment is based on cointegration, error correction models, and threshold and momentum threshold autoregressive models. Our findings are consistent with the existence of capital mobility and the ‘Strong’ form of foreign debt sustainability.

Notes

¹ As Afxentiou (2000) has pointed out, however, from a development strategy point of view, a country must achieve a certain level of economic development before it can allow a diversion of its limited savings abroad or receive a significant amount of foreign capital. If the government shirks its development responsibilities and permits free outflows of capital before self-sustained development is achieved, it runs the risk of perpetuating the vicious cycle of poverty and condemning investment to unacceptable low levels.

² The literature's interpretation on the existence of long-run relationship between national savings and investment has been rather confusing. Earlier studies on the subject (Miller, 1988; Gulley, 1992) have interpreted the existence of long-run relation as evidence in favour of capital immobility and lack of long-run relation as evidence in favour of capital mobility. More recent literature (Coakley and Kulasi, 1997; De Vita and Abbott, 2002) have used the existence of such a long-run relationship as evidence in favour of ‘solvency constraint’.

³ As Husted (1992) notes, cointegration is a necessary condition for the economy to satisfy its intertemporal budget constraint and the condition that b ₁ = 1 is not. If the initial external debt is positive, then b ₁ need only be less than or equal to one. However, a value of b ₁ < 1 is inconsistent with a finite external debt-to-gross domestic product ratio, and hence the sustainability of external deficit. That is, there is an incentive for the country to default on its international debts.

⁴ As Petrucelli and Woolford (1984) show, the necessary and sufficient conditions for the stationarity of e _t is ρ⁺ < 0, ρ⁻ < 0, and (1 + ρ⁺)(1 + ρ⁻) <1 <0, for any value of τ. Under these conditions, e _t  = τ may represent the long-run equilibrium value of e.

⁵ This procedure obtains τ by minimizing the sum of squared residuals after sorting the estimated residuals in an ascending order, and eliminating 15% of the largest and smallest values.

⁶ Critical values for these tests are tabulated in Enders and Siklos (2001).

⁷ If the null hypothesis of asymmetry is rejected, then the least squares of ρ⁺ and ρ⁻ have an asymptotic multivariate normal distribution and standard test statistics apply.

⁸ The ADF tests use one auxiliary regressor as suggested by Schwarz–Bayesian criterion, Hannan–Quinn criterion, AIC criterion and maximum-likelihood criterion. The Perron procedure tests for the existence of unit roots when the date of possible change in the intercept, the slope or both is not known a priori.

⁹ For similar applications of this procedure see Wu (1998) and Payne et al. (2006).

¹⁰ Given the possibility of stationary savings and imports, we also tested for the long-run relation between saving and investment and between exports and imports using the ARDL approach proposed by Pesaran et al. (2001). Again, the null hypothesis of no cointegration cannot be rejected. The F-statistic of 3.695 falls below the lower bound critical value of 3.793.

¹¹ DOLS is the dynamic ordinary least square regression of X _t on a constant, the dummy variable, D where D = 1.0 for t > 1985 and 0.0 otherwise, M _t , Δ X _t 1, Δ X _t − 2, Δ X _t + 1 and Δ X _t + 2.

¹² The computed t-statistic for the null hypothesis that the slope parameter equals one is 3.129, which is larger than the 5% critical value of 2.021.