Empirical Relation between Real Exchange Rate and Current Account Deficit J Curve Analyses for Turkey

The positive impacts of devaluation of national currency on current account deficit are one of the main arguments in international economic theory. Basic idea is that countries easily increase their exports and have current account surplus by simply reduce the international value of home currency. The success of this policy heavily depends upon response time process of export promotion and import reduction. Due to the shape of the curve for the relation between time and current account balance this analyses is called J curve. If the response of current account deficit is quite slow to the home currency devaluation in time process, the cure of this policy will be quite limited and the shape of the curve will be flat. Alternatively if the time response of current account balance is fast the success of the policy will be quite high. The notion of johansen method analyses would be very good method for the estimation of this relation between two macroeconomic variables. In this paper I do discuss the feasibility of J curve analyses under the framework of those models. That will enable policy makers about the success of devaluation policy of home currency for current account deficit problem of Turkish economy. There are a lot of academic studies on current account deficit problem of Turkish economy. Main derive behind that is high current account deficits are accompanied by high growth rates which is basically unsustainable in long term. The high market interest rate and low exchange rate policy create fiscal problems during the economic crisis that foreign capital flows out from Turkey in a very short time period. Nominal exchange rates can be misleading in explaining those capital movements and their reasons. So some economists like Krugman proposed real exchange rate parity in order to get much more reliable explanations.