An Intertemporal Benchmark Model for Turkey’s Current Account

deficits of these levels for a few years. All these countries are in a far more stable economic
climate than Turkey and therefore even though they have high current account deficits and are not
facing crises, it is insufficient to conclude that Turkey will not suffer a crisis. Nevertheless, the
evidence of other countries does cast doubt on the arbitrary threshold to determine current
account sustainability.

In addition, this definition of sustainability does not shed light on the future potential of a
country. If Turkey can repay current deficits by generating trade surpluses in the future, then the
high current account deficit is not problematic. There is reason to be hopeful in Turkey. Earlier
we noted that net investment income (one of the components of the current account) is negative
for the entire period. This implies that the returns on investment in Turkey owned by foreigners
are greater than returns earned by Turkish residents from their investments abroad. Essentially
this means that investment in Turkey is profitable, which indicates the potential for future growth.

In our paper we use an intertemporal model to address the issue of Turkey’s current account
sustainability. The following section discusses the analytical framework of the intertemporal
approach to current account modeling.

III.   Intertemporal model of current account sustainability

The Theoretical Model

We use the intertemporal model of current account determination by Ghosh and Ostry (1995).
According to this framework when national cash flow increases there will be a current account
deficit where national cash flow is computed as the difference between GDP and investment and
government spending (q_t - i_t - g_t ). Ghosh and Ostry (1995) argue that a country is more likely
to borrow if they are growing.

The model assumes a small open economy that has a single infinitely lived representative
agent. The agent’s utility function is given by

<<   4   5   6   7   8   9   10   >>

More intriguing information