Assesment of the twin deficits hypothesis in terms of Turkey: quantile cointegration application

Current account and budget deficit which are significant in terms of the country economies have been one of the subjects which are discussed in the economic literature in recent years. In the literature, there are different approaches about the relationship between the current account and budget deficit. The first approach is the "Twin Deficits Hypothesis" which is the traditional view asserting the long-term relationship between these two variables. The second approach is the "Ricardian Equivalence Hypothesis" which does not have a long-term relationship between these two variables. The purpose of this study is to introduce theoretical framework of quantile CUSUM cointegration test which is quite current test and able to search cointegration relationship in different quantiles and also to investigate twin deficit hypothesis in terms of Turkey for from 1975-2016. İn this context first, it is introduced quantile regression which is the theoretical basis of quantile CUSUM cointegration test. Afterward, it is explained quantile CUSUM cointegration test which investigates non-linear cointegration in null of cointegration and also it is explained the theoretical background. At the same time, it is presented the general framework of the current account deficit and budget deficit in this study. On the other hand, it is also given place to the results of Engle-Granger, Harris-İnder and Bayer-Hanck cointegration tests in this study. İn addition, there is a result of the error correction model in this study. As a result of the quantile CUSUM cointegration test of this work, it has been detected a long-term relationship for all conditional quantiles of the current account deficit in Turkey for 1975-2016 period. But as the opposite of the conventional theory, while it has been found the direction of the relationship between these two variables is negative from ten percent to eighty percent, it has been only found positive at ninety percent level. This result shows that the direction of the relationship between current account deficit and budget deficit changes according to the percentage of the current account deficit. Also as a result of Engle-Granger and Harris-İnder cointegration tests in this study, it appears that the Twin deficits hypothesis is valid and with the results that are obtained from the error correction model there is a positive relationship between these variables. As a result of Bayer-Hanck Cointegration Test, it appears that the Ricardian Equivalence Hypothesis is valid for Turkey for during the period 1975-2016.