The determinants of current account deficit in Turkey

Increasing globalization became a major phenomenon for countries which caused and even further made the economic decisions to be dependent to each other. The current account imbalances became one of the most discussed topics due to these dependencies. Likewise the current account deficit has become the core of economic discussions in Turkey's economy. Considering the current account balance as one of the most important indicators of economic performance and its role in economic and financial crisis, the determinants of current account deficit in Turkey should be further analyzed and identified. This study analyzes the determinants of current account imbalances in Turkey by testing the hypothesis with regard to the historical progress and global economic conditions. The hypothesis tested in this research can be summarized in two dimensions. First dimension is the import-dependency and structure of Turkish industrial production as a main cause of chronic current account deficits. The other one is the increasing domestic demand due to the changes in global economic conditions and increasing capital movements towards emerging economies after 2000 and increasing commercial activities in non-manufacturing industries. In the study, the determinants of current account deficit is analyzed with Vector-Autoregressive (VAR) models for the period 1999:Q1-2019:Q2 by using quarterly data. The results are obtained by employing Granger Causality Tests, Impulse-Reponse function and variance decomposition. According to the empirical results, the increasing domestic demand by increase in the income level, investments on the import-dependent technologies and inflow of foreign resources for economic growth lead the increase in current account deficits and cause the deficit to be even chronical.