The world financial markets are integrated more than ever. Together with countries opening their economies to the world, we see the dynamics of capital movements changing together with how countries respond to their domestic capital needs. Today, foreign capital is financing most of Turkey’s current account deficit. With this paper, we show that the main reason why Turkey is borrowing so much money from international markets and its current account deficit is substantial, is global liquidity rather than domestic conditions. We spend more, either for consumption or investment, due to the availability of cheap money. The availability of cheap credit prevents the economy to self-adjust through movements in exchange rates which would narrow the current account deficit.
We find that U.S. interest rates, Turkish current account balance and Turkish real GDP are non-stationary and cointegrated which prevented us from using an ordinary least square estimation. Instead, we use a vector error correction model to estimate the relationship between these variables. We find that there is a long-run causal relationship from U.S. interest rates to Turkish current account balance. We further confirm our results with Granger causality tests and support the view
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