Sustainability and financing of current account deficits: The Turkish case
Economic theory and empirical research show that either foreign direct investment or external debt, or a combination of the two, can be used to finance a growing current account deficit in the medium to long run. If both financing methods fail, the best solution is to reduce the deficit itself by depreciating the local currency either by market forces or by policy intervention. Sustainability of the Turkish current account deficit was assessed in time-series data over 33 years. Results show that sustainable current account deficits were recorded during periods of economic stability, whereas periods of economic instability coincided with unsustainable deficits. This paper develops a model with policy implications for calculating a sustainable level of current account deficit and verifies its validity by applying it to the Turkish setting.
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