Abstract:

In this study the effect of foreign direct investment (FDI) on current account deficit was investigated by using the quarterly data of 1991:Q4-2013:Q1 periods for Turkish economy. Economic growth variable which is an important determinative of the current account deficit was also included in the analysis. The analysis was carried out with the bounds testing approach developed by Pesaran, Shin and Smith (2001) and besides the constant model, constant and trend model was also used unlike the literature. According to the empirical findings from the study, it was determined that there was a cointegration between the variables. According to this, the effect of FDI on the current account deficit in long term analysis was found negative and statistically significant in accordance with our theoretical expectations. Furthermore, in short term analysis coefficient of error correction term was negative and statistically significant. So the deviations occurring between the variables converge to the long term balance level. However, in Toda-Yamamoto and Vector Error Correction Model (VECM) short term causality analysis a one-way relationship was determined from the FDI to the growth and the current account deficit. Additionally, in Vector Error Correction Model (VECM) long term causality analysis a two-way relationship was determined among the variables.

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