Can Current Account Balance Maintain Price Stability? Evidence from Fourier Area for Turkish Economy

Price instability and current account imbalance have been the main trouble of Turkish economy for many years. Within the policies which are applied with the purpose of providing economic stability, preferring economic growth as the primary target, devaluations upon exchange rate shocks that happened at different periods and related economic uncertainty as well as the instability stemming from public sector paved the way for inflation and current deficit. Prolonged inflation and current deficit constituted an enormous impediment for economic growth. Central Bank’s associating current balance and price stability for their recent policy preferences drew the attention to the relation between these two variables. For this reason, 1974-2020 current account balance – gross national product ratio and the relationship between current account balance and inflation is analyzed through Fourier cointegration test. Fourier cointegration test results provide evidence for the existence of long-term relation between the variables. With the Fourier causality test, on the other hand, while it has been approved that there is causality from inflation to current account balance, the causality from current account balance to inflation has been rejected.