The Role Of Twin Deficit Problem In Sustainable Growth: An Econometric Analysis For Turkey

In economics literature the relationship between budget deficit and current account deficit is known as twin deficit hypothesis. The Keynesian Approach accepts a relationship between two deficits. In contrast to this, Ricardian Equivalence Hypothesis defends there is no relationship between these two deficits. Twin deficit has become the subject of several studies to test which of these hypotheses are reliable but no consensus has achieved. Some studies found a relationship from budget deficit to current account deficit but some of them had the opposite result. Especially after 1980 it is known that many developed and developing countries encountered with this twin deficit problem. Also Turkey has the problem of twin deficit. Therefore, it is important to find whether there is a causality between them and the direction of this causality. In this study the relationship between budget deficit and current account deficit is examined by using Johansen Cointegration Analysis. This study is based on period 1996:Q1-2011:Q4. According to results of co-integration; variable coefficients are statistically significant and consistent with what we expected in hypotheses. CAD has a significant negative effect on BD. When there is a 1% increase in CAD, BD decreases 0,12%. This finding is consistent with economic theory because according to Keynesian Approach two deficits have relationship with each other. However, in contrast to this approach, the direction is from CAD to BD and also coefficient is negative. Keywords:Budget Deficit, Current Account Deficit, Sustainable Growth, Econometric Modeling, Turkey