Re-examining Turkey's trade deficit with structural breaks: Evidence from 1989-2011

Erten, Irem and Okay, Nesrin (2012): Re-examining Turkey's trade deficit with structural breaks: Evidence from 1989-2011.

Abstract

The goal of this paper is to examine the sustainability of the trade deficit of Turkey with cointegration techniques allowing for structural breaks. We follow Husted (1992) model, which shows that if a country’s exports and imports are cointegrated, and if the cointegrating vector is (1,-1), then its trade deficit is sustainable. First, classical cointegration tests indicate that exports and imports are cointegrated, but the cointegrating vector significantly differs from (1,-1). Next, the existence of cointegration is confirmed with an alternative method proposed by Silvestre and Sanso (2006) controlling for structural breaks. Our analysis detects two breaks in the cointegration relationship on 2001:01, and 2008:09, coinciding with economic crises. We show that since 2001, Turkish trade deficit has not been sustainable in the strong form, and after 2008, the country has moved away from sustainability. Based on our analysis, the sustainability of Turkey’s widening trade deficit is highly doubtful.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exports, Imports, Trade Deficit, Sustainability, Cointegration, Structural Breaks
• 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; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Baharumshah, A. Z., Lau, E. and Fountas, S. (2003) On the Sustainability of Current Account Deficits: Evidence from Four Asian Countries, Journal of Asian Economies, 14, 465-487.

Bai, J. and Perron, P. (1998) Estimating and Testing Linear Models with Multiple Structural Changes, Econometrica, 66, 47-48.

Bai, J. and P. Perron. (2003) Computation and Analysis of Multiple Structural Change Models, Journal of Applied Econometrics, 18, 122.

Banerjee, A. and Carrion-i-Silvestre, J.L. (2006) Cointegration in Panel Data with Breaks and Cross-Section Depen- dence, European Central Bank, Working Paper Series No. 591.

Beaulieu, J. J. and Miron, J. A. (1993) Seasonal unit roots in aggregate U.S. data, Journal of Econometrics, 55, 305-328.

Beyer, A., Haug, A. A., Dewald, W.G. (2009) Structural Breaks, Cointegration and the Fisher Effect, European Central Bank, Working Paper Series No. 1013, February. Available at http://www.ecb.europa.edu.

Binatli, A. O. and Sohrabji, N. (2012) Intertemporal Solvency of Turkeys Current Account, Panoeconomicus, 1, 89-104.

Bozdagloglu, E. Y. U. (2007) An Analysis of Turkey’s Imports and Exports Through the Cointegration Method (1990-2007), Gazi Universitesi iktisadi ve dari Bilimler Fak¨ultesi Dergisi, 9, 213-224.

Carrion-i-Silvestre, J. L. and Sanso, A. (2006) Testing the Null of Cointegration with Structural Breaks, Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, 68, 623-646.

Castro, T.B. and Osborn, D. R. (2008) Testing for seasonal unit roots in periodic integrated autoregressive processes, Econometric Theory, 24, 1093-1129.

Clemente, J., Montanes, A. and Reyes, M. (1998) Testing for a unit root in variables with a double change in the mean, Economics Letters, 59, 175-182.

Crokett, A. and Goldstein, M., Strengthening the International Monetary System: Exchange Rates, Surveillance and Objective Indicators, Washington, D.C.: International Monetary Fund, (1987).

Dickey, D. A. and Fuller, W.A. (1981) Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root, Econometrica, 49, 1057-72.

Engle, R. F. and Granger, C.W.J. (1987) Cointegration and Error Correction: Representation, Estimation and Testing, Econometrica, 55, 251-276.

Erbaykal, E. and Karaca, O. (2008) Is Turkey’s Foreign Deficit Sustainable? Cointegration Relationship between Exports and Imports, International Research Journal of Finance and Economics, 14. Available at http:// www.eurojournals. com/finance.htm.

Esteve, V., Navarro-Ibanez, M. and Prats, M. A. (2011) The Spanish term structure of interest rates revisited: Cointe- gration with multiple structural breaks, 1974-2010, Instituto Universitario de Desarollo Regional, Facultad de Ciencias Economicas y Empresariales, Universidad de la Laguna.

Goktas, O., Tunali, C. B. and Hepsag, A. (2011) The Sustainability of Current Account Deficits in the Presence of Structural Shift: The Case of Turkey, Middle Eastern Finance and Economics, March 11, 132-41.

Gregory, A.W., Nason, J. M. and Watt, D. (1996) Testing for Structural Breaks in Cointegrated Relationships, Journal of Econometrics, 71, 321-341.

Husted, S. (1992) The Emerging U. S. Current Account Deficit in the 1980s: A Cointegration Analysis, The Review of Economics and Statistics, 74, 159-66.

Hylleberg, S., Engle, R. F., Granger, C. W. J. and Yoo, B. S. (1990) Seasonal integration and cointegration, Journal of Econometrics, 44, 215-238.

Johansen, S. (1991) Estimating and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models, Econometrica, 59, 1551-1580.

Johansen, S. and Juselius, K. (1990) Maximum Likelihood Estimation and Inference on Cointegration with Applica- tions to the Demand for Money, Oxford Bulletin of Economics and Statistics, 52, 169-210.

Johansen, S. (1988) Statistical Analysis of Cointegration Vectors, Journal of Economic Dynamic and Control, 12, 231-254.

Kalyoncu, H. (2005) Sustainability of Current Account For Turkey: Intertemporal Solvency Approach, Prague Eco- nomic Papers , 1.

Kwaitkowski, D., Philips, P.C.B., Schmidt, P. and Shin, Y. (1992) Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root, Journal of Econometrics, 54, 159-178.

Lee, C.-C., and Chang, C.-P. (2005) Structural breaks, energy consumption, and economic growth revisited: Evidence from Taiwan, Energy Economics, 27, 857-872.

Onel, G. and Utkulu, U. (2006) Modelling the long-run sustainability of Turkish external debt with structural changes, Economic Modelling, 23, 669-682.

Perron, P. (1990) Testing for a Unit Root in a Time Series with a Changing Mean, Journal of Business and Economic Statistics, 8, 153-162, April.

Phillips, P.C.B. and P. Perron. (1988) Testing for a Unit Root in Time Series Regression, Biometrika, 75, 335346.

Sekmen, F. and Saribas, H. (2007) Cointegration and Causality Among Exchange Rate, Export, and Import: Empiri- cal Evidence From Turkey, Applied Econometrics and International Development, 7. Stock, J.H. and Watson, M.W. (1993) A simple estimator of cointegrating vectors in higher order integrated systems, Econometrica, 61, 783-820.

Ucan, O. and Putun, M. (2011) Examining the Sustainability of External Deficits in Turkey, Middle Eastern Finance and Economics, 9. Available at http://www. eurojournals.com/MEFE.htm.

Utkulu, U. (1998) Are The Turkish External Deficits Sustainable? Evidence From the Cointegrating Relationship Between Exports and Imports, D.E. ¨U.˙I.˙I.B.F. Journal, 13, 119-132.