The sustainability of the Turkish current account: Smooth structural break and asymmetric adjustments

Abstract

AbstractIn this study, we investigate the sustainability of Turkish current account to GDP ratio in the long run by testing the null hypothesis of a unit root against the alternative of the smooth structural break with sign and/or size nonlinearity. Using nonlinear unit root tests, we find strong evidence in favour of the sustainability of Turkish current account deficit after taking into account both the smooth structural break and asymmetric speed of adjustment towards mean values. The core of our conclusion is twofold: first, we find that current account deficit is sustainable for Turkey in the analysed period; and second, sustainable current account deficit increased to around 5% of GDP in Turkey after the smooth structural break. Our results point out that current account deficits about 5% of GDP are sustainable if current account deficits permit greater FDI inflows and long‐term external borrowings that much more oriented towards productive activities in the economy. However, if domestic investments are mainly financed by short‐term external borrowings, then running current account deficits around 5% of GDP in the long run may generate inherent problems.