AN EXAMINATION OF THE CAUSALITY RELATIONSHIP BETWEEN CURRENT AND FINANCIAL ACCOUNTS IN TURKEY

Abstract

In today’s economies, where commerce and the economy are strongly in-terrelated, the relationship between current account and financial account has become crucial. However, economists have not reached a consensus regarding the direction of the causality relationship between capi-tal and current accounts. Our study aims to contribute to the literature by determining the direction of the causality relationship between current and financial accounts in Turkey, applying the Johansen Cointe-gration Test and the Vector Error Correc-tion (VEC) model to quarterly data for 2002–2018. The empirical results show that the causality relationship in Turkey runs from the financial account to the current account. This means that capital inflows to Turkey have the potential to deteriorate the current account balance. Therefore, it is of crucial importance that Turkey implement policies to manage the financial account in order to provide a current account balance.