Twin Deficit Hypothesis and Reverse Causality: An Empirical Study on Turkish Economy

The twin deficit hypothesis is a hypothesis suggesting that the current deficit and the budget deficit move together. According to this hypothesis, the existence of a relationship between two variables is handled in different ways. While the Traditional Keynesian View argues that there is causality from the budget deficit to the current deficit, the Ricardian Equivalence Hypothesis claims that there is no relationship between two variables. The Current Account Targeting view, named by Summers, is that there is causality from the current deficit to the budget deficit, contrary to the Keynesian theory. The twin deficit, affecting both developed and developing countries as a result of liberalization experienced in the 1980s, continues to be the problem of countries today. In this study, Turkey’s current deficit and budget deficit were investigated whether there was any interaction between these variables. In order to determine the direction and degree of this interaction, it was tried to obtain a result about the existence of the concept of reverse causality within the framework of the twin deficit hypothesis between 2009: 1Q and 2020: 2Q. For the budget deficit and current deficit data compiled as time series, cointegration analysis and the bound test based on the Autoregressive Distributed Lag model approach were applied. Then, the direction of causality was determined with the Error Correction Model. As a result of the analysis, it was determined that the direction of the relationship between two variables is negative in the long term and positive in the short term. According to these results, while the Current Account Targeting view is supported by the short term findings, the Keynesian view is rejected.