An Intertemporal Benchmark Model for Turkey’s Current Account

Working Paper # 06/01

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.

Keywords: Current account sustainability, intertemporal benchmark model, Turkey
JEL Classification: F32, F37 and F41

Ayla Ogus

Department of Economics
izmir University of Economics

Izmir, Turkey 35330

Email: [email protected]

Niloufer Sohrabji

Department of Economics

Simmons College

Boston, USA

Email:[email protected]

^* The authors would like to thank seminar participants at Middle Eastern Technical University, Ankara,
Turkey, for comments on an earlier version of this paper.

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