Does Credit Growth 'Cause'Current Account Deficits? Evidence from Turkey

Aylin Soydan

doi:10.13189/aeb.2016.040204

Abstract

The extent of current account deficits in the Turkish economy has reached alarming levels in the past few years. Beside other arguments, one line of debate has recently been put forward by the Central Bank of the Republic of Turkey; it is stated that credit expansion in the economy has been one of the leading reasons behind the large current account deficits. When the annual credit growth reached the level over 30 per cent in 2010, concerns regarding financial and macroeconomic stability were pronounced, and some policy measures were taken by the central bank in order to bring credit growth down to more ‘sustainable' levels, as stated. This study aims to empirically analyse the relationship between current account balances and domestic credit dynamics in the case of Turkey. To this end, the paper employs the ARDL bounds testing methodology and investigates causality implications between domestic credit and external balance variables. The empirical findings of the study suggest Granger causality running from domestic credit growth to external balances.

Highlights

Large and persistent current account deficits especially in developing economies have regained attention within the academic and policy making circles over the past decade
It is necessary to confirm that all the variables satisfy the underlying assumptions of the autoregressive distributed lag (ARDL) bounds testing approach, i.e. no variable is I(2) as the critical bounds provided by Pesaran et al (2001) [12] are not valid if the order of integration of any of the variables is greater than one
While large current account deficits have been one of the critical issues, high credit growth rates in the past few years have led to distress about financial and macroeconomic stability in the Turkish economy

Summary

Introduction

Large and persistent current account deficits especially in developing economies have regained attention within the academic and policy making circles over the past decade. The Turkish economy has witnessed an upward trend in current account deficits since the mid-2000s. Following the 2001 crisis, the current account deficits-to-GDP ratio started increasing; when the ratio reached the 4 per cent level in 2004, deterioration in the current account balances was fairly disturbing. Regarding the deterioration in current account balances of the economy, one line of debate was put forward by the Central Bank of the Republic of Turkey (CBRT), along with other arguments. It was stated that high credit growth had been one of the foremost reasons for the large current account deficits of the economy since the mid-2000s.1. When the domestic credit growth rate in Turkey reached the level over 30 per cent in 2010, concerns regarding financial and macroeconomic stability were pronounced by the authorities It was stated that high credit growth had been one of the foremost reasons for the large current account deficits of the economy since the mid-2000s.1 When the domestic credit growth rate in Turkey reached the level over 30 per cent in 2010, concerns regarding financial and macroeconomic stability were pronounced by the authorities

Objectives

Methods

Results

Conclusion