Testing Twin Deficits and Saving-Investment Nexus in Turkey

Ferda Halicioglu and Kasım Eren
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Kasım Eren: Department of Economics, Yildiz Technical University, Istanbul, 34349 Turkey

Yildiz Social Science Review, 2017, vol. 3, issue 1, 35-46

Abstract: This paper provides fresh evidence on the validity of twin deficits 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 deficits 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 hypothesis; cointegration; TurkeyJournal: Yildiz Social Science Review (search for similar items in EconPapers)
JEL-codes: F00 F30 G00 G10 K00 K20 M00 M20 O10 (search for similar items in EconPapers)
Date: 2017
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Related works:
Working Paper: Testing Twin Deficits and Saving-Investment Nexus in Turkey (2017)
Working Paper: Testing Twin Deficits and Saving-Investment Nexus in Turkey (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:aye:journl:v:3:y:2017:i:1:p:35-46

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