THIRLWALL’S BPCG MODEL WITH CAPITAL FLOWS AND DISAGGREGATED IMPORTS SECTORS USING A SIMPLIFIED * GENERAL SOLUTION (SGS): THE CASE OF TURKEY, 1998-2019

Abstract

In this paper, we considered an extended version of the BPCG model incorporating both the capital inflows and some possible structural changes by disaggregating total imports into intermediate, consumption and capital imports for the 1998-2019 period to study the Turkish economy. We calculated the rate of growth of Turkish income for the extended BPCG model based on a Simplified General Solution (SGS) using the estimated income and price elasticities of demands for three types of imports separately and the time-varying shares of exports earnings in total imports expenditures and the time-varying shares of intermediate, consumption and capital imports sectors. The time-varying shares are introduced in order to capture some structural changes in the composition of imports and the type of financing the trade deficit in addition to the changes in the composition of manufactured imports. We observed that the economic growth in Turkey was almost always accompanied with heavy capital inflows which helped the financing of the merchandise trade deficits. Even though the real exports increased by an average of 6.01% during 1998-2019 period, its relatively small contribution to the rate of growth of income was found to be due to the fact that we took into account the rise in intermediate imports attributable to an increase in manufactured exports confining the BP-Equilibrium growth rate of Turkish income. Moreover, we also found that an average of 0.49% deterioration in the real exchange rate (RER) had a very small effect. We also pointed out that the short-run variations may be more important from a policy perspective, where the policy-makers may be more concerned for the next two or three years by taking into account the short run influences of especially those of expected abrupt changes in capital flows. Finally, we noticed that a first stylized fact for the Turkish economy seemed to be abrupt decreases in capital flows before/during the recessions like those in 2001 and 2009 and a second stylized fact that the Turkish economy grows during the periods when heavy capital inflows increase, generally after the recessions.