Applied Econometrics and International Development Vol (2010) mail:

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1 Applied Economerics and Inernaional Developmen Vol (2010) DETERMINANTS OF CURRENT ACCOUNT: THE RELATION BETWEEN INTERNAL AND EXTERNAL BALANCES IN TURKEY UZ, Idil 1 Absrac This paper considers he major deerminans of he curren accoun in Turkey. I examines he long-run and shor-run impac of he exchange rae and privae and public savings on he curren accoun balance. The bounds esing auoregressive disribued lag (ARDL) approach o coinegraion is used and he resuls indicae ha here is srong suppor for coinegraion relaionship beween curren accoun balance and he seleced variables. The exchange rae has he sronges impac on he curren accoun, bu he signs vary in he long-run and in he shor-run. Finally, he sudy suppors he presence win defici phenomenon in Turkey, bu he relaion is slighly weaker han expeced. JEL Codes: F31, F32, F4 Keywords: Twin defici, ARDL Approach, Bounds es. 1. Inroducion The deerminans and he dynamics of he curren accoun consiue an imporan opic in open economy macroeconomics. Alernaive heories ry o predic he sign and he magniude of he curren accoun deerminans. Differen approaches o esing he empirical implicaions of hese heories sill arac considerable ineres. Among he analyses of he curren accoun, he relaion beween exernal and inernal balances, deficis in specific, deserves significan aenion in he lieraure. Deficis ofen are cied as eiher a cause or a sympom of economic weaknesses. However, as Pakko wries, deficis are neiher causes nor sympoms of weaknesses, bu are among he many macroeconomic quaniies ha are deermined joinly by he decisions and ineracions of households, firms and governmens a boh naional and inernaional markes' (Pakko, 1999, 13). The quesions regarding he deerminans of fiscal balance and he curren accoun araced aenion in he early 1980s and laer in he 2000s, mainly because of he high curren accoun defici of he US. Examples of hese include early sudies by Mc Kinnan (1980), Laney (1984), Bernheim (1988), Miller and Russek (1989), Enders and Lee (1990), Dewald and Ulan (1990), Rosenweig and Tallman (1993). Recen sudies such as Mann (2002), Obsfeld and Rogoff (2004, 2005) Erceg e al. (2005), Bordo (2006), Coughlin e al. (2006), Salvaore (2006), Corsei and Muller (2006) and Kim and Roubini (2008) have sudied wheher he budge defici causes rade defici. There are some sudies supporing he win deficis such as Bernheim (1988), Roubini (1988), Miller and Russel (1989), Normandin (1999), Salvaore (2006), Chinn and Prasad (2003). There are also sudies ha found suppor for he exisence of win divergence such as Evans (1986), Enders and Lee (1990), Dewald and Ulan (1990), Erceg e al. (2005), Corsei and Muller (2006) and Kim and Roubini (2008). Addiionally, here are some sudies providing mixed evidence such as Darre (1988), Abell (1990), Rosenweig and Tallman (1993), Kao and Coskey (1999) and Chin and Prasad (2003). 1 Idil Uz, Deparmen of Economics, Yediepe Universiy, Kayisdagi, 34755, Isanbul, Turkey. E- mail: idiluz@yediepe.edu.r

2 Applied Economerics and Inernaional Developmen Vol (2010) The analysis of he relaionship beween he budge defici and he curren accoun defici has recenly araced aenion in Turkey. Generally, he sudies by Zengin (2000), Akbosanci and Tunc (2001), Yucel and Aa (2003) have used various VAR echniques providing evidence ha shows he presence of he win deficis. Addiionally, Acaravci and Özürk (2008) sudied he coinegraion relaionship beween exernal accoun and fiscal balance using ARDL approach and found causaliy wih one direcion running from he budge defici o he curren defici. This sudy invesigaes he major deerminans of he curren accoun in Turkey for he shor run and long run. Furhermore, i sudies wheher here is a coinegraion relaionship beween he curren accoun and major variables such as he exchange rae (ER), privae saving decisions and he fiscal balance in Turkey. This also allows for considering he effecs of he governmen spending shock on he exernal secor. Undersanding he facors behind he curren accoun flucuaions could have imporan policy implicaions. The recen episodes of macroeconomic urbulence in many emerging markes including Turkey have creaed increasing concerns and gahered ineres in his opic. This sudy is differen from earlier sudies ha focus primarily on he analysis of he shor-erm and long-erm flucuaions in he curren accoun in Turkey. I also ries o deermine he relaionship beween he curren accoun and is deerminans by using recen economeric echniques, raher han he simple relaionship beween he curren accoun and he budge balance. Furhermore, he paper s objecive is o provide primarily an empirical, raher han an enirely heoreical, characerizaion of curren accoun deerminans ha will be helpful for consrucing more formal heoreical models. Our model in secion 3 relaes he curren accoun balance (X-M) o aggregae demand componens. The approach developed in he macro-economeric models from he supply side published by Guisan(2007) and (2008) regarding he imporan role of indusrial developmen in Turkey and oher OECD counries o explain foreign rade and economic growh also is ineresing. Some commens on his approach are included in secion 2. The analysis is srucured as follows: Secion 2 sars wih an overview of he composiion of he curren accoun and he recen developmens. Secion 3 explains he heory and he model used in his analysis. Secion 4 shows he mehodology and secion 5 discusses he empirical resuls of he analysis. Finally, secion 6 gives concluding remarks. 2. Undersanding he Curren Accoun in Turkey Before esing he dynamics of he curren accoun flucuaions in Turkey, i is imporan o presen an overview of he developmens for he composiion of he curren accoun. Table 1 shows he composiion of he curren accoun in Turkey. There has been a seady increase in he amoun of he curren accoun defici. The larges componen, and he one ha accouns for nearly he enire defici, is he merchandise rade. This componen is also he mos imporan variable accouning for mos of he flucuaions in he curren accoun over ime. In conras o he defici in merchandise rade, Turkey has a sable surplus in service rade. However, recen rends show ha here has been a reducion in he amoun of service rade surplus. The hird caegory of he curren accoun is income on invesmens. As foreign residens have accumulaed Turkish asses over 116

3 Uz, I. Deerminans of Curren Accoun: Relaion beween Inernal and Exernal Balances in Turkey ime, his caegory reflecs he rising deb-service paymens. The ne ouflow as ineres paymens in Turkey is greaer han he paymens of ineres on Turkish invesmens abroad. The final caegory is ne unilaeral ransfers. This caegory consisenly has been in a surplus for a long ime. Table 1. Composiion of he Curren Accoun (Billions of dollars) Merchandise Expors Impors Balance Services Expors Impors Balance Income on Invesmen Inflows Ouflows Balance Ne Unilaeral ransfers Curren Accoun Balance Source: Cenral Bank Republic of Turkey As shown in Figure 1, i is apparen ha he curren accoun has been volaile over he pas decade. Neverheless, i is more meaningful o sudy he magniude of he curren accoun defici relaive o he size of he economy. Figure 1 shows ha here has been a significan increase in he size of he curren accoun defici as a percenage of he GDP since This draws he aenion of academics as well as policymakers back o he deerminans of he curren accoun and raises he possible argumens from he poliical and heoreical aspecs. Figure 1 Curren Accoun as a Percenage of he GDP Source: Cenral Bank Republic of Turkey, OECD. 117

4 Applied Economerics and Inernaional Developmen Vol (2010) The increase in defici usually arises when a counry ries o foser non-indusrial producion wihou enough indusrial developmen: as a consequence, impors of indusrial facors increase more han expors. As seen in Guisan(2009) and oher sudies developmen of indusry allows a more even developmen of foreign rade and nonindusrial producion avoiding increase of rade defici. Indusrial developmen also allows developmen of non-indusrial secors, including public services, avoiding increases in he public defici. Turkey has a low level of impors and expors per capia in comparison wih oher OECD counries, as seen in Guisan and Cancelo (2002) and oher sudies. These auhors found several facors ha explain he level and balance of foreign rade. They noiced ha Turkey had similar levels of expors per capia o hose of Japan and he Unied Saes, bu for differen reasons: while Japan and he USA had high levels of indusrial developmen and high levels of domesic indusrial rade, he case of Turkey was differen wih much lower levels of indusrial developmen. Figure 2 shows he posiive impac of indusrial real value-added on non indusrial secors in Turkey and similar resuls have been found for oher OECD counries in Guisan Figure 2. Real Valued Added per capia of indusrial and non indusrial secors in Turkey, (housand dollars a 2000 prices and exchange raes) Non Indusrial Secors Indusrial Secors Source: Elaboraed from OECD Naional Accoun Saisics. As seen in Guisan and Exposio (2006) Turkey almos doubled real indusrial producion per capia in he period , bu i is ye clearly below he OECD average and is value will be surpassed by ha of China a he end of ha period, in spie of he lower Chinese level of indusrializaion a he saring poin. I is very imporan o recommend indusrial developmen per capia in Turkey o increase real income per capial and o lower he level of curren accoun defici per inhabian. 3. Theoreical Model The framework of he naional accouns defines a clear relaionship beween exernal and inernal balances wihin an economy. Y C I G X M ) (1) ( 118

5 Uz, I. Deerminans of Curren Accoun: Relaion beween Inernal and Exernal Balances in Turkey where By rearranging he variables, ( X M ) Y C G I (2) hen, ( X M ) S I (3) C G I is equal o he sum of privae and public consumpion, and herefore Y C G S, naional saving. This means ha he exernal accoun has o equal he difference of naional savings and invesmen. This relaionship implies ha he curren accoun is relaed o saving and invesmen in he economy direcly. I is common in lieraure o assume rade defici as a proxy for curren accoun, alhough he laer includes ne invesmen income and ne unilaeral ransfers (Enders and Lee, 1990; Kim and Roubini, 2008). Therefore, he polices supporing invesmen have a negaive impac on he curren accoun, while policy measures reducing privae or public consumpion have a posiive impac on he curren accoun because hey increase naional saving. Furher insighs ino policy implicaions are given by dividing he naional saving ino public and privae saving. p g ( X M ) ( Y T C ) ( T G ) I S S I (3) Afer insering he real variables o he model, i becomes as follows: TB NT PC NT PI ( Y C ) ( G ) I (4) P P P P P where TB is he nominal rade balance, P is he GDP deflaor, NT is he axes ne of ransfers, PC is he price of final consumpion goods ha are purchased, and P I is he price of final invesmen goods. So, he real rade balance is he sum of real privae and public saving minus real invesmen. If he privae savings is roughly equal o invesmen, hen he exernal accoun and public budge are direcly inerrelaed, or winned. According o he Mundell-Flemming approach, he exernal accoun and fiscal balance have o move in he same direcion. In oher words, an increase in budge defici causes an increase in ineres raes, resuling in urn in an increase in capial inflows and appreciaion of he domesic currency hereby causing a curren accoun defici. A fiscal defici is causing curren accoun defici, he so-called win deficis. Alernaively, higher real ineres raes induce an appreciaion of he real exchange rae; he relaive price of impored goods falls, while he relaive price of expored goods rises in he foreign marke. This may increase he erms of rade, however, boosing real impor demand and reducing expor demand. The increase in real impor demand is parly offse by a decline in privae consumpion and invesmen spending if he income effec of he high ineres rae is large. Furhermore, a rise in he budge defici leads o a fall in naional saving unless here is an equal offseing rise in privae savings. Therefore, an increase in he budge defici had o reduce eiher privae invesmen or ne expor. Twin defici is a abbreviaed way of saying ha almos all of ha adjusmen was in ne expors. The division of he response o lower saving beween invesmen and rade defici depends on cerain key parameers and on changes in exernal environmen. The facors on which he magniude of he responses of real rade demand depends are (Erceg e al., ): 119

6 Applied Economerics and Inernaional Developmen Vol (2010) The magniude of he real exchange rae appreciaion and he sensiiviy of he exchange rae o he level of ineres rae, The price elasiciies of expor and impor demand, and Facors ha deermine he response of privae consumpion and invesmen spending, i.e., he sensiiviy of he invesmen o ineres rae. Furhermore, wih oher hings he same, decline in invesmen is a smaller fracion of he fall in naional saving when invesmen has low sensiiviy o ineres rae, or/and he exchange rae is sensiive o he level of ineres rae or/and rade is sensiive o exchange rae. This mixure of changes in invesmen and ne expor need no be a response o a decline in naional saving, le alone o an increase in he budge defici. More fundamenally, he response o a budge defici or, more generally, o a fall in savings is no likely o be he same in he long run as in he shor run. Changes in domesic saving are generally balanced in he shor run by changes in inernaional flows, bu changes in domesic savings ha persis lead o parallel change in domesic invesmen. Feldsein and Horioka (1980) find a subsanial degree of correlaion beween he counry s domesic saving and domesic invesmen raes over he medium erm. This shows ha capial is no very mobile across naional borders. The aim of his sudy is o assess he major deerminans of he curren accoun and o sudy wheher here is a win defici in Turkey by using recen economeric echniques. Firs, he curren accoun will be used as an endogenous variable and exchange raes, privae savings and public savings for exogenous variables. The exchange rae is used o measure he price elasiciy of rade demand. Increase in he domesic exchange rae is associaed wih he appreciaion of he currency, where i decreases he compeiiveness of he counry and deerioraes he curren accoun. We expec a posiive sign beween privae saving decisions and he curren accoun balance. Any increase in privae savings reduces consumpion boh of domesic and foreign goods. As a resul, reducion in impors improves curren accoun balance. Under hese circumsances, he model becomes as: CA p g a0 a1er a2s a3s (5) where CA is curren accoun, ER is he exchange rae, S p is he privae savings and S g is he governmen saving and ε is he error erm. 4. Mehodology The es for coinegraion in a single-equaion framework is based on he coefficien of he lagged dependen variable in an auoregressive disribued lag (ARDL) model used by Hendry and Richard (1982). A relaively recen economeric echnique developed by Pesaran e al. (1996, 2001) is used o esimae he long-run relaionship among variables. The bounds esing or auoregressive disribued lag (ARDL) approach ess he coinegraion relaionship wihou requiring he same order of inegraion of all variables. Laer, he model was exended by including he error correcion erm (Phillips and Lorean, 1991; Saikkonen, 1991; Hendry, 1995). The focus of he analysis is o sudy he long-run relaionship and dynamic ineracions among he variables of curren accoun. However, o incorporae he shorrun dynamics, he model has been esimaed by he using ARDL approach o coinegraion. Furhermore, he reasons for ARDL are as follows: 120

7 Uz, I. Deerminans of Curren Accoun: Relaion beween Inernal and Exernal Balances in Turkey I is simple, allowing coinegraion relaionship once he lag order of he model is idenified. I does no require uni roo es herefore i is applicable irrespecive of wheher he regressors in he model are purely saionary I(0), purely non-saionary I(1) or muually coinegraed. The es is relaively more efficien in small samples or finie sample daa sizes. The procedure will however become obsolee in he presence of I(2) series (inegraed of order 2). The ARDL approach involves wo seps for esimaing he long-run relaionship (Pesaran e al., 2001). The firs sep is o examine he exisence of long-run relaionship among all variables in an equaion and he second sep is o esimae he long-run and shor-run coefficiens of he same equaion. We run he second sep only if we find a coinegraion relaionship in he firs sep. This sep deermines he appropriae lag lenghs for he independen variables. Finally, he sudy uses a more general formula of error correcion model (ECM). In error-correcion models, he long run mulipliers and shor run dynamic coefficiens improve he model as follows: p p p p p 0 1 CA i 2 log ER i 3 S 1 4 BD i 1CA 1 2ER 1 i 1 i 0 i 0 i 0 CA S S EC p g (6) The ARDL approach is used o esablish wheher he dependen and independen variables in each model are coinegraed. The null of no coinegraion, i.e. H 0 is esed agains he alernaive of H 0 : : So, we are looking a he ARDL bounds esing approach o esimae hese equaions by ordinary leas square (OLS) es in order o es for he exisence of coefficiens of he lagged variables. We have o conduc a Wal-ype (F-es) coefficien resricion es, which enails ' esing he above null hypoheses, H 0 and H 0. Pesaran e al. (2001) compued wo ses of asympoic criical values for esing coinegraion. The firs se assumes variables o be I(0), he lower bound criical value (LCB) and he oher I(1), upper bound criical value (UCB). If he F-saisic is above he UCB, he null hypohesis of no coinegraion can be rejeced irrespecive of he orders of inegraion for he ime series. Conversely, if he es falls below he LCB, he null hypohesis canno be rejeced. Finally, if he saisic falls beween hese wo ses of criical values, he resul is inconclusive. The resuls of he F-es are sensiive o lag lenghs. However, as Pesaran and Pesaran (1997, 305) argue, he variables in regression in firs differences are of no direc ineres o he bounds coinegraion es. Thus, a resul ha suppors coinegraion a leas any one lag srucure provides evidence for he exisence of long-run relaionship. Alernaively, Kremers e al. (1992) and Banerjee e al. (1998) have demonsraed ha in an ECM, a significan lagged error-correcion erm is a relaively more efficien way of esablishing coinegraion. So, he error correcion erm can be used when he F-es is inconclusive. The model in equaion 6 shows ha α represens he shor-run dynamics and β represens he long-run dynamics of he curren accoun, as will be discussed laer. Following 121

8 Applied Economerics and Inernaional Developmen Vol (2010) Nielsen (2004), using any dummy in an auoregressive model is avoided. According o Nielsen (2004), he bes resuls are obained for he case where he coinegraion rank is iniially deermined in a model wih no dummies. The CUSUM (Cumulaive Sum of Recursive Residuals) and CUSUMQ (Cumulaive Sum of Square of Recursive Residuals) sabiliy ess are incorporaed in he coinegraion procedure. The coinegraion relaionship does no imply he sabiliy of he esimaed model; appropriae sabiliy ess need o be conduced addiionally afer he coinegraion is esablished. In his paper he sabiliy ess, which are CUSUM and CUSUMQ, are also conduced in order o invesigae he sabiliy of he esimaed model as he informaion on he sabiliy of exchange rae model is very imporan for policy makers in dealing wih exchange rae policy designing. 5. Daa Sources and Empirical Resuls The daa used in his paper were drawn from differen sources. The lising of he mnemonics for he variables used in he analysis is given below. This sudy includes quarerly daa for he period 1987Q1-2008Q2. Definiions for he seleced daa are as follows: CA Trade balance is used as a proxy for curren accoun and obained from he Cenral Bank of he Republic of Turkey. ER Exchange Raes are he US dollars per naional currency and increases denoe appreciaion of domesic currency, obained from he Cenral Bank of he Republic of Turkey. S p Privae Savings are calculaed from he gross domesic produc expendiure approach, which is equal o GDP minus privae consumpion. Daa was obained from he Turkish Saisical Insiue. S g Public Savings are he consolidaed budge balances obained from he Republic of Turkey Minisry of Finance All variables excep exchange raes are represened as a raio of he GDP. The analysis considers invesigaing wheher here is a coinegraing relaionship beween curren accoun and is variables. As Bahmani-Oskooee and Brooks (1999) showed in heir sudy, he resuls of he F-es are sensiive o lag ess. Therefore, four lags were used in he F-es and he lag selecion is based on Akaike Informaion Crieria (AIC). The resul of he bounds esing approach for coinegraion shows ha he calculaed F-saisic is 5.48 and ha i is significan a 5 percen level as he criical values of he upper level of bounds are 4.45, 5.07 and 6.36 for 10, 5 and 1 percen level of significance, respecively (Pesaran e al., 2001). The F-es shows ha he null hypohesis if no coinegraion can be rejeced. The nex sep requires he ARDL mehod o esimae he shor-run and long-run elasiciies. Furher discussion regarding o he exisence of coinegraion will be discussed by examining he error correcion erm in Table 3 in he Annex. The long-run coefficiens of he variables under invesigaion are shown in Table 2 in he Appendix. All esimaed coefficiens excep privae savings are found saisically. The magniude of he ER has he highes among oher seleced parameers. This shows he ambiious relaionship beween he exchange rae and he curren accoun. 122

9 Uz, I. Deerminans of Curren Accoun: Relaion beween Inernal and Exernal Balances in Turkey Excess demand for goods is mainly a funcion of he real exchange rae. Furhermore, excess demand (supply) in domesic goods markes resuls in ne impors (expors), in order o mainain shor run equilibrium. So here is a sraighforward relaionship beween he exchange rae and he curren accoun balance. J-curve is used o explain he relaionship beween exchange rae and he curren accoun. Curren accoun worsens immediaely afer depreciaion. Then, appreciaion reduces demand for expors and increases demand for impors, worsening he curren accoun. Addiionally, here is a posiive relaionship beween he curren accoun balance and he privae saving decisions. However, i is no saisically significan in he long run. Finally, here is a posiive relaionship beween governmen saving and curren accoun balance ha is consisen wih he earlier sudies. However, his sudy shows ha he magniude of he coefficien is slighly lower. The esimaed coefficien suggess ha if he raio of he public budge balances o GDP changes by one uni, which is 1 percenage poin, he raio of curren accoun o GDP on average changes almos by 0.1 percenage poin. The resuls of he shor-run coefficien esimaes associaed wih he long-run relaionships obained from he ECM version of ARDL model and are presened in Table 3. Since i akes ime for hese variables o exer heir impac on he curren accoun, we expec a naion s curren accoun balance o be relaed o boh conemporaneous and lagged values of he seleced variables. This means ha curren accoun balances are a funcion of or depend on curren as well as lagged values of exchange rae, privae saving and he public budge balances. The resuls of his analysis found srong suppor for he shor-run relaionship beween he curren accoun and is seleced deerminans excluding public savings. All variables excep public savings are saisically significan. Table 3 shows ha here is a posiive relaionship beween exchange rae and curren accoun; in oher words, appreciaion of he currency causes improvemen in he curren accoun balance. One possible explanaion is ha some porfolio balance heoriss give imporance o he curren accoun of he balance of paymens of invesmen income accruing o he domesic economy from domesic holdings of foreign asses. A shor-run increase (decrease) in he value of hese holdings, if no reversed in he long run, will be associaed wih a rise (fall) domesic ineres income on foreign asses, and a consequen decrease (increase) in he surplus required on oher curren accoun iems consisen wih a zero balance. Thus, curren accoun surpluses will be associaed wih appreciaing and deficis wih depreciaing currencies. There is a posiive relaionship beween curren accoun and privae saving decisions and i is saisically significan in he shor run. Increase in savings reduces consumpion boh on domesic and foreign producs, reducing impors and improving curren accoun. However, public saving is no found saisically significan in he shor run. The error correcion (EC) coefficien shows he speed of adjusmen of variables reurn o equilibrium and i should have a saisically significan coefficien wih negaive sign. The error correcion erm EC -1, which measures he speed of adjusmen o resore equilibrium in he dynamic model, appears wih negaive sign and i is saisically significan a a 5 percen level, ensuring ha he long-run equilibrium can be aained. Bannerjee e al. (1998) holds ha a highly significan error correcion erm is furher proof of he exisence of a sable long-run relaionship. Furhermore, esing he significance of he EC -1 is a relaively more efficien way of esablishing coinegraion. 123

10 Applied Economerics and Inernaional Developmen Vol (2010) Thus, he error correcion erm for his analysis provide evidence o assume here is coinegraion beween he curren accoun and is deerminans. Table 4. Diagnosic Tess for he Shor-Run Model R LM (4) 4.44 Normaliy 2.22 Heeroskedasiciy 0.34 RESET 0.75 CUSUM STABLE CUSUMQ STABLE Noes: *,**,*** refer o 10, 5 and 1 percen level of significance. Lagrange muliplier es of residual serial correlaion for lag 4 wih he null of no serial correlaion. Jarque-Bera saisic used for esing normaliy. Heeroskedasiciy is based on he regression of squared residuals on squared fied values wih he null of no heeroskedasiciy. Ramsey's RESET es using he square of he fied values. Disribued as X 2 wih 1 d.f.. 6. Concluding Remarks The aim of his paper was o invesigae he long-run and shor-run empirical relaionship beween curren accoun balances and a broad se of macroeconomic deerminans. I ried o underline he major causes of curren accoun defici using he simple Mundel-Flemming approach. The resuls show ha here is a coinegraion relaionship beween he curren accoun and macroeconomic variables seleced in his sudy. We found a srong coinegraion relaion boh in he long run and he shor run. The appreciaion of he domesic currency is associaed wih improvemen in he curren accoun, supporing he porfolio approach of he balance of paymens in he shor run. In he long run, however, depreciaion of he currency improves he curren accoun. There is a posiive relaionship beween he curren accoun and privae saving decisions boh in he long run and shor run, bu saisically significan only in he long-run. Finally, while his sudy found he exisence of he win defici phenomenon, he relaionship is weaker han expeced. References Abell, J.D. (1990), Twin Deficis during he 1980s: An empirical invesigaion, Journal of Macroeconomics 12: Acaravci, A. and I. Ozurk (2008), Twin Deficis Phenomenon: Empirical evidence from he ARDL bound es approach for Turkey, Bullein of Saisics and Economics, Auumn. Akbosanci, E. and G.I. Tunc (2002), Turkish Twin Deficis: An error correcion model of rade balance, Economic Research Cener (ERC) Working Papers in Economics 01/06. Banerjee, A., J.J. Dolado and R. Mesre (1998), Error-Correcion Mechanism Tess for Coinegraion in a Single Equaion Framework, Journal of Time Series Analysis 19: Bernheim, B.D. (1988), Budge Defici and Balance of Trade, in Tax Policy and he Economy, Cambridge: MIT Press, Bordo, M. (2006), Globalizaion and Imbalances in Hisorical Perspecive, Working Paper No. 13, Federal Reserve Bank of Cleveland. 124

11 Uz, I. Deerminans of Curren Accoun: Relaion beween Inernal and Exernal Balances in Turkey Chinn, M.D. and E.S. Prasad (2003), Medium Term Deerminans of Curren Accouns in Indusrial and Developing Counries: An empirical exploraion, Journal of Inernaional Economics 59: Corsei, G. and G. Mueller (2006), Twin Deficis: Squaring heory evidence and common sense, Economic Policy 48: Coughlin, C.C. and M.R. Pakko, W. Pool (2006), How Dangerous is he US Curren Accoun Defici? The Regional Economis April: 5-9. Darra, A.F. (1988), Have Large Budge Deficis Caused Rising Trade Deficis? Souhern Economic Journal, 54: Dewald, W.G. and M. Ulan, (1990), The Twin Defici Illusion, Cao Journal 10: Erceg, C.J., L. Guerrieri, and C. Gus (2005), Expansionary Fiscal Shocks and he Trade Defici, Inernaional Finance Discussion Papers 825, Board of Governors of he Federal Reserve Sysem. Enders, W. and B.S. Lee (1990), Curren Accoun and Budge Deficis: Twins or disan cousins? Review of Economics and Saisics 72: Evans, P. (1986), Is he dollar high because of large budge defici? Journal of Moneary Economics 18: Feldsein, M. and C. Horioka (1980), Domesic Saving and Inernaional Capial Flows, The Economic Journal 90: Guisan, M.C. and Cancelo, M.T. (2002). Economeric Models of Foreign Trade in OECD Counries, Applied Economerics and Inernaional Developmen, Vol.2-2, on line. Guisan, M.C. and Exposio, P. (2006). Producion by secor in China, India and OECD Counries, , Regional and Secoral Economic Sudies, Vol. 6-2, on line. Hendry, D. and J.F. Richard (1982), On he Formulaion of Empirical Models in Dynamic Economerics, Journal of Economerics 20: Hendry, D. (1995), On he Ineracion of Uni Roos and Exogeneiy, Economerics Review 14: Kao, C. and S. McCoskey (1999), Comparing Panel Daa Coinegraion Tess wih an Applicaion o he Twin Defici Problem, Mimeo, NY: Syracuse Universiy. Kim, S. and N. Roubini (2008), Twin Defici or Twin Divergence? Fiscal policy, curren accoun, and real exchange rae in he US, Journal of Inernaional Economics 74: Kremers, J. J. M., N. R. Ericsson, and J.J. Dolado (1992), The Power of Coinegraion Tess, Oxford Bullein of Economics and Saisics 54: Laney, L. O. (1984), The Srong Dollar, he Curren Accoun, a Federal Deficis: Cause and effecs, Federal Reserve Bank of Dallas Economic Review, McKinnon, R. I. (1980), Exchange Rae Insabiliy, Trade Balances, and Moneary Policies in Japan, Europe, and he US, in P. Oppenheimerm, ed., Issues in inernaional economics ( ), Boson: Oriel Press. Miller, S.M. and F.S. Russek (1989), Are he Deficis Really Relaed? Conemporary Policy Issues 7: Normandin, M. (1999), Budge Defici Persisence and he Twin Defici Hypohesis, Journal of Inernaional Economics 49: Pakko, M.R. (1999), The US Trade Defici and he New Economy, Federal Reserve Bank of S Lois Review, Sepember/Ocober. Pesaran, M.H. and B. Pesaran (1997), Working wih Microfi 4.0: Ineracive Economeric Analysis,Oxford Universiy Press, Oxford. Pesaran, M.H., Y. Shin and R.C. Smih (2001), Bounds Tesing Approaches o he Analysis of level Relaionships, Journal of Applied Economics 16:

12 Applied Economerics and Inernaional Developmen Vol (2010) Phillips, P. and M. Lorean (1991), Esimaing Long-Run Equilibria, Review of Economeric Sudies 58: Rosensweig, J.A. and E.W. Tallman (1993), Fiscal Policy and Trade Adjusmen: Are he deficis really wins? Economic Inquiry 31: Saikkonen, P. (1991), Asympoically Efficien Esimaion of Coinegraion Regressions, Economeric Theory 7: Salvaore, D. (2006), Twin Deficis in he G-7 Counries and Global Srucural Imbalances, Journal of Policy Modelling 28: Mann, C.L. (2002), Perspecives on he US Curren Accoun Defici and Susainabiliy, Journal of Economic Perspecives 16: Nielsen, H. B Coinegraion Analysis in he Presence of Ouliers, Economerics Journal, 7, Obsfeld, M. and K. Rogoff (2005), Global Curren Accoun Imbalances Exchange Rae Adjusmens, Brookings Papers on Economic Aciviy 1: Yucel, F. and A.Y. Aa (2003), (Turkish) The Twin Defici Hypohesis under he Coinegraion and Causaliy Tess: Evidence on Turkey, Cukurova Universiy Insiue of Social Sciences, Journal of Social Sciences 12. Zengin, A. (2000), The Twin Deficis Hypohesis: The Turkish Case, Zonguldak Karaelmas Universiy, Faculy of Caycuma Economics and Business Adminisraion, Deparmen of Economics, Zonguldak, Turkey. Appendix Table 2. Long-run Behavior of Curren Accoun C ER Sp Sg ** *** ** ARDL(3,4,4,1) ( (14.69) ( (7.65) ( (0.33) ( (0.07) *,**,*** refer o 10, 5 and 1 percen level of significance. Sandard errors are in paranheses. Table 3. Error Correcion Represenaions of ARDL Model ΔCA1 ΔCA2 ΔER ΔER1 ΔER2 ΔER3 ΔS p ΔS p 1 ΔS p 2 ΔS p 3 ΔS g 0.19 ** *** *** *** ** * 0.24 ((0.11) ((0.10) ((7.88) ((8.42) ((8.65) ((8.48) ((0.23) ((0.27) ((0.24) ((0.23) ((0.03) EC *** ((0.13) *,**,*** refer o 10, 5 and 1 percen level of significance. Sandard errors are in paranheses. Noe: ΔCA1 = CA(-1) CA(-2); ΔER=ER ER(-1); ΔER1=ER(-1) ER(-2); ΔER2=ER(-2) ER(-3); ΔER3=ER(-3) ER(-4); ΔS p =S p S p (-1); ΔS p 1=S p (-1) S p (-2); ΔS p 2=S p (-2) S p (-3); ΔS p 3=S p (-3) S p (-4); ΔS g =S g S g (-1); ΔS g 1=S g (-1) S g (-2). Journal published by he EAAEDS: hp:// 126