Analysis of twin deficits hypothesis with linear time series

In recent years, the studies which investigates the reasons of the change in trade deficit has concentrated on the government expenditures. The aim of this study is to test the validity of twin deficits hypothesis for Turkey in the period 1970-2012. In this context, Dickey-Fuller (1979), Phillips-Peron (1988) unit root tests, the unit root tests Zivot-Andrews (1992) with one structural break and Lee-Strazicich (2003, 2004) with two structural breaks are applied. Finally, linear Granger causality test obtained from vector autoregression models and Breitung and Candelon (2006) causality test are applied. Regarding to empirical analysis results, in short run, twin deficits hypothesis is valid for Turkey, but in long run, Ricardian equivalence hypothesis which rejects twin deficits hypothesis is accepted. Keywords: Twin deficits, budget deficit, current deficit, unit root test, frequency domain causality test