Identification of Current Account Deficit: The Case of Turkey

Abstract

Turkey is a developing, small, open economy with a volatile growth pattern. One of the major problems of its economy is the current account deficit (CAD) problem. Analyzing the current account deficit, one faces more than one transmission channel: (i) credit growth would increase GDP growth and the CAD; (ii) increases in growth would cause real exchange rate appreciation, thereby increasing imports and the CAD; and (iii) increases in capital inflows would result in exchange rate appreciation, which would stimulate imports and discourage exports, increasing the CAD. This article analyzes these transmission mechanisms to CAD by using a vector autoregression (VAR) methodology for the period 1987Q1 to 2011Q4.

KEYWORDS:

• current account deficit
• Turkey
• vector autoregression (VAR)

Notes

² For detailed analyses of the determinants of the current account deficit see Ozatay 2006; Parikh 2006; Cakman and Cakmak 2007; Erkilic 2006; Lebe et al. 2009; Peker and Hotunluoglu 2009; Telatar and Terzi 2009; Sekmen and Calisir 2011.

³ See Berument and Dincer (2004) on the effects of capital flows on Turkish economy.

⁴ See Brook et al. 2004; Barnett and Straub 2008; Liang 2012; Kandil and Greene 2002; Edwards 2005; Bems, Dedola, and Smets 2007; Fratzscher, Juvenal, and Sarno 2007.

⁵ See Khan and Knight 1983; Debelle and Faruqee 1996; Elliot and Fatas 1996; Milesi-Ferretti and Razin 1998; Calderon et al. 2002; Giuliodori 2004; Chinn and Prasad 2003; Herwartz and Siedenburg 2007; Ang and Sek 2011.

⁶ See Kalyoncu 2005; Cakmak and Varlik 2007, Togan and Ersel 2007; Togan and Berument 2007; Ongan 2008; Ogus and Sohrabji 2008a,b; Polat 2011; Eken 1990; Kasman et al. 2005; Ozmen 2005; Erkilic 2006; Cakman and Cakmak 2007; Lebe et al. 2009; Telatar and Terzi 2009; Erdogan and Bozkurt 2009; Sekmen and Calisir 2011; Kayikci 2012.

⁷ See Gunluk-Senesen and Senesen (2001) and Senesen and Gunluk-Senesen (2003) for empirical analyses of import dependency in Turkey.

⁸ The capital account balance data are available after 1992.

⁹ The results are available upon request.