Non-linearity in sustainability of current account balance in Turkey

Abstract

This study aims to test current account deficits (CAD) sustainability for Turkish data of 1992Q1-2021Q1. To this end, an empirical model that relates real exports to real imports plus interest payments on external debt is estimated using both linear and non-linear ARDL (NARDL) technique, and linear and asymmetric cointegration among the model variables is tested with the bound test for cointegration approach. While the bound test result of the linear ARDL model provides no evidence to support the sustainability of the current account, the NARDL bound test results indicate that Turkey’s current account balance is sustainable. Moreover, the study results have shown that both positive and negative shocks to imports affect exports significantly and asymmetrically in the short-run and the long-run. Although the impact of positive shocks to imports on exports is significantly higher than the impact of negative shocks, in the long run, the negative shocks cause export growth to decrease at a higher rate than positive shocks in the short-run.