Testing Twin Deficits and Saving-Investment Nexus in Turkey

Ferda Halicioglu and Eren Kasim

MPRA Paper from University Library of Munich, Germany

Abstract: This paper provides fresh evidence on the validity of twin deficit and the Feldstein-Horioka hypotheses for Turkey during the period of 1987-2004 using bounds testing approach to cointegration. In order to explain the main determinants of the current account deficits in the long-run, the fiscal balance and the domestic investments are used in an econometric model.The cointegration tests indicate the presence of a long-run relationship between the current account and budget deficits as well as the domestic investments during the estimation period. As a result, it is concluded that the twin deficit hypothesis and the Feldstein-Horioka puzzle are present and Turkey appeared to be integrated in the world capital market with a low degree of capital mobility as less than 1/5 of its domestic investment is financed through external funds. The augmented Granger-causality tests suggest no causality between the current account and budget deficits, both in the short-run and the long-run. The post-sample variance decompositions suggest that the domestic investments are the main cause of current deficits in the long-run. The paper also discusses the policy implications of the empirical results.

Keywords: twin deficits; Feldstein-Horioka hypotheses; cointegration; Turkey (search for similar items in EconPapers)
JEL-codes: C22 F32 F36 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ara and nep-opm
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Journal Article: Testing Twin Deficits and Saving-Investment Nexus in Turkey (2017)
Working Paper: Testing Twin Deficits and Saving-Investment Nexus in Turkey (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:50098

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