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Öner Günçavdi () and Burç Ülengi̇n
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Öner Günçavdi: Economic and Social Research Centre (ESCR), Faculty of Management, Istanbul Technical University, Süleyman Seba Cd., No. 2, 34367 Maçka – Istanbul, Turkey
Burç Ülengi̇n: Faculty of Management, Istanbul Technical University, Turkey

Middle East Development Journal (MEDJ), 2012, vol. 04, issue 02, 1-20

Abstract: Despite its recent growth performance, the Turkish economy has been experiencing current account imbalances, and has so far been able to continue these imbalances without jeopardizing economic growth. However, recent uncertainties in the world economy have urged policy makers to control these imbalances and to take actions accordingly in the short-run. The literature postulates that expenditure reduction and expenditure switching policies are two conventional measures to implement in an economy suffering from current account deficits. In this regard, the aim of the paper is to examine the role of expenditure components in import demand, which is among one of the most crucial elements of current account items. The empirical results indicate that demand for imports has a very sluggish adjustment process in response to any policy shocks, and consumption and export expenditure together with the relative prices are the important factors that seem to influence this adjustment process. The high dependence of domestic production on foreign intermediate goods and the reluctance of the Turkish entrepreneurs for import substitution (mainly due to an unfavorable business climate) could be regarded as the reason for this sluggish adjustment process of import demand. This research accordingly shows that these conventional measures (such as those that are included by expenditure reduction and expenditure switching policies) might be necessary but not sufficient, and it would require more structural and long-run policy actions to deal with recent current account difficulties in the Turkish case. The empirical findings also indicate that the import requirement of exports is very high. This, together with high import dependency of domestic production, calls for structural and long-run policy actions that would help to increase the value added to Turkish exports.

Keywords: Aggregate imports; linear expenditure system; current account imbalances; Turkey; error–correction model (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1142/S1793812012500113

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