The Relationship between Current Deficit and Economic Growth: An Empirical Study on Turkey

Abstract

This study aims to examine the relationship between the current account deficit and economic growth in Turkey. For this purpose, Granger causality and VAR analyses were performed on the variables by using their quarter data for 1999:01 - 2014:02. Granger causality test revealed a unidirectional correlation from growth rate to current account deficit. As shown by the impulse-response functions obtained through VAR analysis, a shock of one standard deviation on the growth rate variable results in effect on the current account deficit variable. Furthermore, in the variance decomposition analysis, growth rate accounts for 53.25% of the prediction error variance for current account deficit during the tenth period, while the current account deficit variable itself accounts for the remaining 46.75% of the prediction error variance.

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