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Testing Twin Deficits and Saving-Investment Nexus in Turkey

Author

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  • Ferda Halıcıoğlu

    (Department of Economics, Faculty of Political Sciences, Istanbul Medeniyet University 34700 Turkey)

  • Kasım Eren

    (Department of Economics, Yildiz Technical University, Istanbul, 34349 Turkey)

Abstract

This paper provides fresh evidence on the validity of twin deficits and the Feldstein-Horioka hypotheses for Turkey during the period of 1987-2004 using bounds testing approach to cointegration. In order to explain the main determinants of the current account deficits in the long-run, the fiscal balance and the domestic investments are used in an econometric model.The cointegration tests indicate the presence of a long-run relationship between the current account and budget deficits as well as the domestic investments during the estimation period. As a result, it is concluded that the twin deficits hypothesis and the Feldstein Horioka puzzle are present and Turkey appeared to be integrated in the world capital market with a low degree of capital mobility as less than 1/5 of its domestic investment is financed through external funds. The augmented Granger-causality tests suggest no causality between the current account and budget deficits, both in the short-run and the long-run. The post-sample variance decompositions suggest that the domestic investments are the main cause of current deficits in the long-run. The paper also discusses the policy implications of the empirical results.

Suggested Citation

  • Ferda Halıcıoğlu & Kasım Eren, 2017. "Testing Twin Deficits and Saving-Investment Nexus in Turkey," Yildiz Social Science Review, Yildiz Technical University, vol. 3(1), pages 35-46.
    • Handle: RePEc:aye:journl:v:3:y:2017:i:1:p:35-46
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    References listed on IDEAS

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    More about this item

    Keywords

    Twin deficits; Feldstein-Horioka hypothesis; cointegration; TurkeyJournal: Yildiz Social Science Review;
    All these keywords.

    JEL classification:

    • F00 - International Economics - - General - - - General
    • F30 - International Economics - - International Finance - - - General
    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • M00 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General - - - General
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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