Abstract
We test for sustainability of Turkey?s current account position between 1987 and 2009 using the intertemporal solvency model of Craig S. Hakkio and Mark Rush (1991) and Steven Husted (1992). According to this approach, the intertemporal budget constraint is satisfied if there is cointegration between exports and imports+ (which include imports, net interest income and unilateral transfer payments). We test for, and find evidence of, cointegration using the standard Johansen test as well as the Allan W. Gregory and Bruce Hansen (1996) test. The latter allows for a structural break in the cointegrating relation. Further, dynamic GLS estimation shows a statistically significant relation between exports and imports+, although, we reject strong current account sustainability. Our evidence suggests that Turkey remains vulnerable to reversals in capital flows, but we believe this vulnerability will diminish as the service component of trade increases.
Highlights
In this paper we examine the present solvency of Turkey’s current account position
Our analysis uses the intertemporal solvency model by Hakkio and Rush (1991) and Husted (1992) which links exports and imports+. Assuming both are integrated of order one, cointegration between exports and imports+ implies that the intertemporal budget constraint of the current account has been satisfied and the current account is on a sustainable path
We use two methods to test for cointegration, the Johansen test and the Gregory Hansen procedure
Summary
In this paper we examine the present solvency of Turkey’s current account position. Large current account deficits can indicate a lack of competitiveness. Milesi-Ferretti and Razin (1996) have argued that a current account deficit to GDP ratio in excess of 5% is large and unsustainable, countries with larger deficits have not always experienced crises. In Turkey’s case, the financial crises in 1994 and 2001 were both preceded by high current account deficits, but these deficits were only observed for a few quarters prior to the crisis. We find no evidence of cointegration between exports and imports+ for the 1992-2007 period which implies that Turkey’s current account was unsustainable for the period as a whole. This is not surprising given that this period includes two major financial crises.
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