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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)

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    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 Function: First version, 2001
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    Bibliographic Info

    Paper provided by ERC - Economic Research Center, Middle East Technical University in its series ERC Working Papers with number 0106.

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    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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    1. Rosenswieg, Jeffrey A & Tallman, Ellis W, 1993. "Fiscal Policy and Trade Adjustment: Are the Deficits Really Twins?," Economic Inquiry, Western Economic Association International, vol. 31(4), pages 580-94, October.
    2. Peeters, Marga, 1996. "The public-private savings mirror and causality relations among private savings, investment and (twin) deficits: A full modelling approach," MPRA Paper 29630, University Library of Munich, Germany.
    3. 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.
    4. Selahattin Dibooglu, 1997. "Accounting for US current account deficits: an empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 787-793.
    5. George Vamvoukas, 1999. "The twin deficits phenomenon: evidence from Greece," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1093-1100.
    6. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
    7. 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.
    8. 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.
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    Cited by:
    1. Aleksander Aristovnik, 2005. "Twin Deficits Hypothesis And Horioka-Feldstein Puzzle In Transition Economies," International Finance 0510020, EconWPA.

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