An Intertemporal Benchmark Model for Turkey’s Current Account

Abstract

In this paper, we analyze the Turkish current account between 1992 and 2004 within an intertemporal benchmark model. Increasingly larger current account deficits in the Turkish economy have caused a great level of discussion of the current account but it has mainly focused on the real exchange rate and short-term international competitiveness. However, changes in the fundamentals of the Turkish economy warrant a longer term approach in the analysis. This paper computes the optimal consumption smoothing current account using the intertemporal benchmark model (IBM) and tests for intertemporal solvency of the current account. We find consumption tilting dynamics are in effect. As expected of borrowing developing countries, Turkey tilts consumption to the present. We find support for one of the implications of the IBM, that the current account Granger-causes future changes in national cash flow as implied by the intertemporal benchmark model. However, we also find that the actual consumption smoothing current account is considerably more volatile than the optimal consumption smoothing current account suggesting that speculative forces have driven capital movements during the sample period. From the trends in data and the model and testable implications we believe that although Turkey breached the intertemporal solvency condition in the 1990s, this is not true for Turkey in the period following the 2001 crisis. Therefore, we conclude that changed fundamentals in Turkey have made the high current account deficits sustainable.Current account sustainability, intertemporal benchmark model, Turkey