Testing Twin Deficits and Saving-Investment Nexus in Turkey

HALICIOGLU, Ferda and EREN, Kasim (2017): Testing Twin Deficits and Saving-Investment Nexus in Turkey.

Abstract

This paper provides further evidence on the validity of twin deficits and the Feldstein-Horioka hypotheses for Turkey during the period of 1987-2004 using bounds testing approach to cointegration. In order to explain the main determinants of the current account deficits in the long-run, the fiscal balance and the domestic investments are used in an econometric model.The cointegration tests indicate the presence of a long-run relationship between the current account and budget deficits as well as the domestic investments during the estimation period. As a result, it is concluded that the twin deficits hypothesis and the Feldstein-Horioka puzzle are present and Turkey appeared to be integrated into the world capital market with a low degree of capital mobility as less than 1/5 of its domestic investment is financed through external funds. The augmented Granger-causality tests suggest no causality between the current account and budget deficits, both in the short-run and the long-run. The post-sample variance decompositions suggest that the domestic investments are the main cause of current deficits in the long-run. The paper also discusses the policy implications of the empirical results.

• Item Type: MPRA Paper
• Language: English
• Keywords: Twin deficits, Feldstein-Horioka hypothesis, cointegration, Turkey
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

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