Abstract

The objective of this paper is to examine the theoretical and empirical linkage between current account deficits and a broad set of economic variables in Turkey. In this respect, Vector auto regression (VAR) setup was employed to specify the determinants of the current account in Turkey between 1987 and 2009. The choice of the set of explanatory variables are motivated by existing debates of these various theories about the current account behavior assuming that there is stable underlying structure that links the current account to these macroeconomic variables. Results indicate that inflation affects current account balance positively whereas growth, openness, oil prices and appreciation of real exchange rate cause the current account balance to deteriorate. 

Key words: Current account, balance of payments, vector auto regression (VAR).