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Turkish Twin Effects: An Error Correction Model of Trade Balance

Author

Listed:
  • 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.

Suggested Citation

  • Elif Akbostanci & Gül Ipek Tunç, 2001. "Turkish Twin Effects: An Error Correction Model of Trade Balance," ERC Working Papers 0106, ERC - Economic Research Center, Middle East Technical University, revised Jun 2001.
    • Handle: RePEc:met:wpaper:0106
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    File URL: http://www.erc.metu.edu.tr/menu/series01/0106.pdf
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    References listed on IDEAS

    as
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    6. George Vamvoukas, 1999. "The twin deficits phenomenon: evidence from Greece," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1093-1100.
    7. Selahattin Dibooglu, 1997. "Accounting for US current account deficits: an empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 787-793.
    8. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Aleksander Aristovnik, 2005. "Twin Deficits Hypothesis And Horioka-Feldstein Puzzle In Transition Economies," International Finance 0510020, University Library of Munich, Germany.
    2. Rodica Pripoaie, 2019. "Analysis of the Evolution of Foreign Trade and the Trade Balance of Romania in the Last 25 Years," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 206-215.

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    More about this item

    Keywords

    Twin deficits; trade deficit; budget deficit; Ricardian equivalence; cointegration; error correction models; unit roots; Turkey;
    All these keywords.

    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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