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Turkish Twin Effects: An Error Correction Model of Trade Balance

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Author Info
Elif Akbostanci () (Department of Economics, METU)
Gül Ipek Tunç () (Department of Economics, METU)
Abstract

Twin deficit hypothesis mainly states that government budget deficits will cause trade deficits. However, this is not the only theoretically possible relationship between the budget deficit and the trade deficit. On the other extreme if Ricardian equivalence hypothesis holds it is also possible that two deficits are not related at all. In this study these hypotheses between the budget deficit and trade deficit for Turkey between 1987 - 2001 period are examined by using the cointegration methodology and by estimating an error correction model. This enabled us to search the relationship between the internal and external deficits both in the short-run and in the long-run. Our analysis showed that there is a long-run relationship between the two deficits. Also the short-run model yielded that worsening of the budget balance worsens the trade balance. Therefore we have concluded that the twin deficit hypothesis holds, and Ricardian equivalence hypothesis is not valid for Turkey during the study period.

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File URL: http://www.erc.metu.edu.tr/menu/series01/0106.pdf
File Format: application/pdf
File Function: First version, 2001
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Publisher Info
Paper provided by ERC - Economic Research Center, Middle East Technical University in its series ERC Working Papers with number 0106.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 18 pages
Date of creation: Jun 2001
Date of revision: Jun 2001
Handle: RePEc:met:wpaper:0106

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Web page: http://www.erc.metu.edu.tr
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Related research
Keywords: Twin deficits; trade deficit; budget deficit; Ricardian equivalence; cointegration; error correction models; unit roots; Turkey;

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  2. Rosenswieg, Jeffrey A & Tallman, Ellis W, 1993. "Fiscal Policy and Trade Adjustment: Are the Deficits Really Twins?," Economic Inquiry, Oxford University Press, vol. 31(4), pages 580-94, October.
    Other versions:
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  4. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-81, August. [Downloadable!] (restricted)
  5. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March. [Downloadable!] (restricted)
  6. Vamvoukas, George A, 1999. "The Twin Deficits Phenomenon: Evidence from Greece," Applied Economics, Taylor and Francis Journals, vol. 31(9), pages 1093-1100, September. [Downloadable!] (restricted)
  7. Dibooglu, Selahattin, 1997. "Accounting for US Current Account Deficits: An Empirical Investigation," Applied Economics, Taylor and Francis Journals, vol. 29(6), pages 787-93, June. [Downloadable!] (restricted)
    Other versions:
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