An Intertemporal Benchmark Model for Turkey’s Current Account

estimate of the consumption tilting parameter for Turkey to the IBM literature on developing
countries, which although extensive, had thus far excluded Turkey.

The model has several implications that we test in our paper. The tests show mixed results
for the IBM for Turkey. One of the implications of the model is that the current account Granger
causes future changes in the national cash flow. Our results here show that the IBM proves to be
a valid framework for Turkey when Granger causality tests are performed on the current account.
We can only weakly support equality of the actual and optimal consumption smoothing current
account in the formal test and the informal test of graphing the two accounts suggest that they are
dissimilar. Finally, we reject the last implication of equality of variance in the two accounts. We
find that actual consumption smoothing current account is significantly more volatile than the
optimal consumption smoothing current account.

We believe that our mixed results are related to the changing fundamentals in Turkey. Our
motivation in this paper was to shed light on the present sustainability of Turkey’s current
account. We therefore, compare Turkey’s current account trends in the period prior to the two
crises with the current situation in Turkey. To do this we divide the sample into two periods, the
first period includes the major crises (prior to mid-2001) and the second beginning in the third
quarter of 2001. As noted earlier, trends in the data in the two periods suggest that Turkey’s
actual current account underperforms compared with the optimal current account in the first
period, but outperforms the optimal current account after 2001. In light of these trends, we argue
that our partial support of the IBM may be linked to the current situation, while rejection of the
intertemporal solvency condition is related to the early 1990s. Therefore, we conclude that
Turkey’s current account deficit while high is sustainable due to changed fundamentals.

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