An Intertemporal Benchmark Model for Turkey’s Current Account

Ghosh (1995) tested the IBM for 5 developed countries including the Canada, Germany,
Japan, UK and US and concluded that the model is able to characterize the direction of the
current account well for the countries in the sample. Ghosh and Ostry (1995) analyzed the IBM
for developing countries. Evidence from 45 countries in their paper shows support for the IBM
for developing countries as well. The IBM has also been used by others to assess current account
sustainability in individual countries. Using the IBM, Hudson and Stennett (2003) conclude that
the current account did not breach the solvency condition for Jamaica. Adedeji (2001) uses both
the model and examines macroeconomic indicators from 1960 to 1997 to conclude that Nigeria’s
current account was unsustainable during that time. We add to this literature by analyzing the
current account sustainability of Turkey. To our knowledge, this is the first time that the
intertemporal approach has been used to model the Turkish current account. From the model and
testable implications we conclude that although Turkey breached the intertemporal solvency
condition in the 1990s, this is not true for Turkey in the period following the 2001 crisis.

The paper is organized as follows: the following section provides background on the Turkish
current account. Section III provides the analytical framework for the intertemporal approach to
studying the current account. This is followed by the empirical analysis in section IV. Section V
summarizes and concludes.

II. Background

In this section we discuss Turkey’s current account and components. The Turkish current
account is highly volatile with a strong seasonal component. In figures 1 and 2 we have graphed
the current account and its components for Turkey using quarterly data from 1992 to 2005.
Figure 1 maps Turkey’s current account balance and the trade balance² in that period and figure 2
shows the trend in net investment income and unilateral transfers.

² For the graphs we have combined the balance of trade of goods and services.

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