Abstract
The impact of capital flows on macroeconomic variables is widely studied in applied literature. In this context, this paper aims to analyze the impact of short-term capital flows and foreign direct investment on current account deficit for Turkey by using quarterly data for the time period 1998-2015. We find out a positive and significant relationship between capital flows and current account deficit and negative insignificant relationship between capital flows and foreign direct investment. We use vector autoregression (VAR) model and impulse responses to analyze dynamics between variables.
Highlights
Short-term capital flows (CAP) and current account deficits (CAD) have been extremely important issues for the economies
In this article we have examined the dynamics of current account deficit, short-term capital flows and foreign direct investment for 1998Q1 to 2015Q4 period for Turkey
Volatile capital flows, banking sector problems and current account deficit are the important vulnerabilities of the Turkish economy
Summary
Short-term capital flows (CAP) and current account deficits (CAD) have been extremely important issues for the economies. The effect of current account deficit is positive for many developing countries. In this context, the problem is how to finance current account deficit. Because current account deficit is not sustainable for the country’s foreign debt and increasing CAD may lead to turbulence in financial markets (Yaman, 2011). From this point of view, the effect of capital flows and foreign direct investments (FDI) will be matter on CAD. The studies in empirical literature include mostly the exchange rate, GDP, interest rate and the inflation rate to analyze current account deficit
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