Current account adjustment in Turkey : 1923-2002

Abstract

In this thesis the balance of payments of Turkey between 1923-2002 is examined with special emphasis on current account adjustment. One of the targets is to evaluate the balance of payments under different economic regimes since 1923 and to identify the changes in the structure of balance of payments. The review of the balance of payments and different development strategies highlights that there is a close relationship between economic growth and balance of payments in Turkey. The second task of this thesis is to identify the determinants of current account balance empirically. A reduced form single equation model of current account with annual and quarterly data is estimated through ordinary least squares (OLS). Next, formal statistical methods are applied to detect possible breaks and shifts in the model. Whether there exists a threshold between the current account balance and economic growth is also questioned. Finally, stability of the model parameters is examined through rolling-regressions analysis. Consequently, current account balance in Turkey has been found to be determined by GDP growth, demand from export markets, terms of trade and foreign exchange volatility, among which GDP growth is the major factor. Formal tests for structural break and test for threshold effects did not provide significant results but analysis of rolling regressions had important results for the current account dynamics in Turkey, which verified that there are shifts and breaks in the current account model. The impact of GDP growth on current account balance declined during 1995-2002 and specifically in 1999. Given the unsustainability of economic growth in this period, the economy could not generate proportionate expenditures during phases of economic growth.