An Intertemporal Benchmark Model for Turkey’s Current Account

the F-statistic was as 36.62 compared to the critical F, 1.69. Therefore, the null of equality of
variance between the two accounts is rejected. From the test we conclude that volatility of the
actual consumption smoothing current account⁹ in Turkey is significantly higher than the optimal
consumption smoothing current account.

Our econometric analysis shows support for the first implication of the IBM which is that the
current account Granger-causes future changes in the national cash flow. We also weakly support
the second implication of equality of the two accounts. We however reject the last implication of
equality of variance in the two accounts. Therefore, we only find partial support for the IBM.
To make sense of these mixed results we return to figure IV which shows interesting trends.
From figure (4) we see that in the first period the actual consumption smoothing current account
is below the optimal for most of the period. This implies that the actual current account deficit
exceeded the optimal current account deficit in the first period. This suggests that Turkey
breached the intertemporal solvency condition in that period which is consistent with the
experience of two major financial crises in this period. However, this pattern does not hold for
the current situation in Turkey. The graphical representation of the actual and optimal
consumption smoothing current accounts in more recent years suggests that the Turkey’s actual
consumption smoothing current account outperforms that predicted by the model except for a
brief period in 2004. It does not appear that the intertemporal solvency condition is currently
breached.

V. Conclusion

In this paper, we use the IBM framework to study the current account movements in Turkey
from 1992 to the present. Within the IBM, we find that the consumption tilting parameter is less
than one which means that consumption is tilted to the present in Turkey. This is consistent with
the literature on consumption tilting dynamics in developing countries. Thus we contribute an

⁹ The F-statistic is the ratio of the variances of the actual to the optimal current account.

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