The current account deficits and macro-economic factors: An empirical analysis of Turkey

Current account deficit has been one of the most discussed and upfront issues for theTurkish Economy. The primary reason for that is the generally accepted belief on its crucial importance for the whole economy. In other words, balance of payments is a kind of mirror of the national economy. The analysis of current account dynamics is directly related to the academic discussions about the current account sustainability and capital movements especially the short term capital inflows called hot money. Keeping aside the views regarding the critical threshold level or ratio for the sustainability, it is accepted as one of the most significant and triggering factors for financial and/or currency crisis in developing countries in recent years, which keeps the issue on the ajanda and makes it potentially important. The modelling and econometric analysis of the magnitude and direction of the relation between the internal-external macroeconomic variables and the current account deficit help the decision-makers to understand the causality and to better forecast the potential level of the current account deficit in the future. Besides, it gives some clues to implement the monetary and fiscal policies on time and take the necessary measures in order to achive a sustainable level.The main purpose of this study is to empirically investigate the determinants and dynamics of Turkey?s current account deficit in the light of both traditional and intertemporal approaches. The former approach is examined by the help of Structural Equation Model, while the latter one is studied by Vector Autoregressive Model and impulse-response function/analysis as a helpful tool to see the dynamic relations between the variables. The empirical findings of the study are as follows.Key Words: Current Account, Determinants of Current Account Deficits, Intertemporal Approach, Turkish Economy,