Cointegration and Causality between Turkish, Imports and GDP: A Structural Analysis

The aim of this paper is to reveal the relation between imports and growth rate in Turkey for the period between the first quarter of 1998 and last quarter of 2014. The touchstone in Turkish economy is the January 24 regulations of 1980. The import led growth strategy of the Turkish economy switched to export led growth strategy after this date. It is an indisputable fact that trade openness triggered to the economic growth progress of Turkey. Yet, the issue should be further investigated. It is being argued by both scholars and politicians that the high growth rates in the mentioned period is achieved by importing raw materials and intermediate goods, thus, growth in Turkish economy has to be accompanied by the increase in imports and thus increase in trade deficit and current account deficit. In the literature, the relations between GDP growth and exports are intensively investigated, however, the relation between the second component of international trade, imports, and GDP growth did not attract that much attention. The main objective of this study is to reveal the presence and direction of Granger causality between Turkish Imports and GDP. The model to be employed in Granger causality (i.e. VAR vs. VECM) depends on whether the variables under question are stationary and/or co integrated. In testing the unit roots, we have followed the Augmented Dickey-Fuller (Dickey and Fuller, 1979) test which eventually became the standard practice in unit root testing. Next, to find the number of co integrating vectors Johansen Maximum Likelihood (Johansen and Juselius, 1990) test is employed.