Abstract:

Turkish economy suffers from chronic current account deficit for many years due to insufficient savings and dependency on import energy and intermediate goods. In order to close the deficit, many developing countries need foreign capital. This is also the case for the Turkish economy. In the pre-financial liberalization period, the direction of causality would be expected from current account balance to foreign capital. After the liberalization, on the other hand, the direction of causality has become an intensively debated issue. This study aims to determine the direction of the causality between current account and financial account using Toda-Yamamoto causality and Hatemi-J asymmetric causality tests. The data cover the period of 2002:01-2017:12. Evidence from the asymmetric causality test shows that the negative shocks of the portfolio investment Granger causes both the negative and the positive shocks of the current account balance in Turkey.

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