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Ball and chain effect: Is Turkey’s growth rate constrained by current account deficit?

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  • Özer, Mustafa
  • Malovic, Marko

Abstract

Persistent and unsustainable current account deficits imply continuous foreign borrowing. In this study, we investigate the causal relationship between Turkish current account deficits (CAD) and growth, by using both traditional Granger and Frequency Domain Causality Tests developed by Breitung and Candelon (BC hereafter) over the period of first quarter of 2002 to the first quarter of 2017, since there is scarcely any definitive empirical study out there yet, systematically exploring the causal relationship between GDP growth and current account over short- and longer run. The results of the study indicate that rising CAD unidirectionally causes growth in both short- and medium-run. Thus, since CAD is financed mostly by short-term debt-creating inflows and Turkey is considered to be the most credit-dependent country across all emerging markets, while Turkey’s excessive reliance on foreign credit comes at the cost of extremely volatile real GDP growth rates, our result raises many doubts about sustainability and stability of future growth trajectory in Turkey.

Suggested Citation

  • Özer, Mustafa & Malovic, Marko, 2020. "Ball and chain effect: Is Turkey’s growth rate constrained by current account deficit?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 558(C).
    • Handle: RePEc:eee:phsmap:v:558:y:2020:i:c:s0378437120305203
    DOI: 10.1016/j.physa.2020.124997
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    References listed on IDEAS

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    Cited by:

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    2. Umar Aliyu Shuabiu & Mohammed A. M. Usman & Behiye Çavuşoğlu, 2021. "The Nexus among Competitively Valued Exchange Rates, Price Level, and Growth Performance in the Turkish Economy; New Insight from the Global Value Chains," JRFM, MDPI, vol. 14(11), pages 1-19, November.

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    More about this item

    Keywords

    Current account deficit; Credit impulse; Thirlwall law; Frequency domain causality; Time domain causality; Turkey;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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