An examination of the causality relationship between current and financial accounts in Turkey

Abstract

In today?s economies, where commerce and the economy are strongly interrelated, the relationship between current account and financial account has become crucial. However, economists have not reached a consensus regarding the direction of the causality relationship between capital and current accounts. Our study aims to contribute to the literature by determining the direction of the causality relationship between current and financial accounts in Turkey, applying the Johansen Cointegration Test and the Vector Error Correction (VEC) model to quarterly data for 2002-2018. The empirical results show that the causality relationship in Turkey runs from the financial account to the current account. This means that capital inflows to Turkey have the potential to deteriorate the current account balance. Therefore, it is of crucial importance that Turkey implement policies to manage the financial account in order to provide a current account balance.

The effects of FDI net inflow on the current account of southeast Europe countries - a panel causality analysis

“…These findings, according to the author, suggest that capital inflows affect the formation of the CA deficit and that the sustainability of this deficit in Turkey requires better management. Karahan and Colak (2020) investigated the direction of the causality between the FA and the CA in Turkey. The research is based on quarterly data using the vector error correction (VEC) model.…”