The sustainability of the Turkish current account: Smooth structural break and asymmetric adjustments

Abstract

In this study, we investigate the sustainability of Turkish current account to GDP ratio in the long run by testing the null hypothesis of a unit root against the alternative of the smooth structural break with sign and/or size nonlinearity. Using nonlinear unit root tests, we find strong evidence in favour of the sustainability of Turkish current account deficit after taking into account both the smooth structural break and asymmetric speed of adjustment towards mean values. The core of our conclusion is twofold: first, we find that current account deficit is sustainable for Turkey in the analysed period; and second, sustainable current account deficit increased to around 5% of GDP in Turkey after the smooth structural break. Our results point out that current account deficits about 5% of GDP are sustainable if current account deficits permit greater FDI inflows and long‐term external borrowings that much more oriented towards productive activities in the economy. However, if domestic investments are mainly financed by short‐term external borrowings, then running current account deficits around 5% of GDP in the long run may generate inherent problems.

İktisadi, Finansal ve Politik Risklerin Türkiye CDS Primine Etkileri

“…Therefore, we can conclude that increases in financial risks play a more important role than economic risks in increasing CDS premium. This result is expected since Turkish economy in the analyzed period can be characterized as a fastgrowing economy with predominantly dependent on foreign financing which leaves Turkish economy more fragile against the changing risk appetite of foreign investors (for further readings see Telli et al, 2008;Özatay, 2008;Macovei, 2009;Uygur 2010;Özatay, 2016;Ozer &Yeldan, 2016;Abioglu et al, 2020). Thus, we can say that the effects of increases in financial risks on CDS spreads are higher than the effects of increases in economic risks for Turkey that is vulnerable to sudden stops.…”

Intertemporal budget constraint and current account sustainability: Evidence from a large emerging economy

“…As a result, the author concluded that a sustainable CA is consistent with the sustainability of external debts. Other notable studies that evaluate CA sustainability, but are not limited to, include Trehan and Walsh (1991), Wu et al (1996), Wu (2000), Christopoulos and León‐Ledesma (2010), Holmes et al (2010), Chen (2011), Andre et al (2018), Hasdemir et al (2019), and Abioglu et al (2021).…”

On the Long-run Sustainability of Current Account Deficits in India: Some Insights from Linear and Non-linear Cointegration Tests

“…For example, studies such as Wu et al (2001), Arize (2002), Irandoust and Ericsson (2004), Baharumshah et al (2003), Baharumshah et al (2005), Fountas and Wu (1999), Shastri et al (2018b), Afonso et al (2019), and Dash (2020) employed time-series and panel cointegration tests to assess the current account sustainability of various countries and regions. On the other hand, some studies, for instance, Christopoulos and León-Ledesma (2010), Holmes et al (2010), Chen (2011a, 2011b), Andre et al (2018), Hasdemir et al (2019) and Abioglu et al (2021), used linear and non-linear unit-root tests.…”