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An Empirical Investigation on Current Account Balance, Inflation, and Real Exchange Rate

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  • Erkan KARA

Abstract

It has been claimed that Turkey, as it is known, has set a low-interest rate and low exchange rate target, and has moved to a new economic model with the intention of both low inflation and current account surplus at the end of 2022. This study aims to find whether lowering the exchange rate and inflation will help reduce the current account deficit. In this study, using the Vector Auto-Regressive model and impulse-response analysis, the relationship between current account balance, inflation, and the real exchange rate is examined using monthly data for the period between 2003 and 2021. Empirical results suggest that there is no relation between the real exchange rate and current account balance in Turkey, except for small responses when looking at the impulse-response analysis. These results seem to be contradicting those who think that a current account surplus will be achieved by lowering the exchange rate in Turkey. The results of this study indicate that both variables, current account balance, and inflation, affect each other in the short term but the effects are fading away in the long run. Further, the study also finds that the exchange rate is an important factor that affects inflation rates due to its pass-through effect.

Suggested Citation

  • Erkan KARA, 2023. "An Empirical Investigation on Current Account Balance, Inflation, and Real Exchange Rate," Fiscaoeconomia, Tubitak Ulakbim JournalPark (Dergipark), issue 3.
    • Handle: RePEc:fis:journl:230323
    DOI: 10.25295/fsecon.1313171
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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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