Current account and current account sustainability: An application of Turkey

The current account of the balance of payments is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).The intertemporal consumption-smoothing approach to the determination of the current account implies that international capital flows act as a buffer to smooth aggregate consumption in the face of temporary shocks in the economic fundamentals (output, investment, and government spending). In this context the current account of Turkey has been examined emprically using the intertemporal approach to know whether the movement of the current account follows the optimizing behavior.Using the Gregory and Hansen (1996) residual-based tests for cointegration in models with regime shifts, we get two sub periods, which represent a potential behavior change between the current account variables. The study also evaluated the solvency condition for Turkey?s current account, and estimates the optimal consumtion-smoothing component for Turkey?s current account based on an intertemporal optimization model for the two sub-periods and carries out a hypothesis test to evaluate the performance of the model.According to the results, in the early 2000s a structural break occured in the relationship between consumption and net cash flows, in that Turkey became more willing to substitute future consumption for current consumption. The results also indicate that capital inflows have been consistent with the satisfaction of Turkey?s intertemporal budget constraint.Key Words: Current Account, Current Deficits, Intertemporal Approach, Sustainability