Identification of Current Account Deficit: The Case of Turkey

Turkey is a developing, small, open economy with a volatile growth pattern. One of the major problems of its economy is the current account deficit (CAD) problem. Analyzing the current account deficit, one faces more than one transmission channel: (i) credit growth would increase GDP growth and the CAD; (ii) increases in growth would cause real exchange rate appreciation, thereby increasing imports and the CAD; and (iii) increases in capital inflows would result in exchange rate appreciation, which would stimulate imports and discourage exports, increasing the CAD. This article analyzes these transmission mechanisms to CAD by using a vector autoregression (VAR) methodology for the period 1987Q1 to 2011Q4.