Sustainability Of Trade Deficit In Turkey

Abstract

This paper empirically investigates the long-run sustainability of trade deficit in Turkey for the period between 2003M01 and 2017M01. As for empirical technique, cointegration and Vector Error Correction Model (VECM) are employed. Empirically, the existence of cointegration is observed between exports and imports. Cointegration represents the long-term relationship between exports and imports, but to test the sustainability of the long-term relationship and the direction of causality, VECM is examined. According to VECM results, trade deficit is not sustainable in the long-run because although any short-term disturbances/imbalances in exports can be corrected in the next period, any disturbances/imbalances come from the imports side cannot be corrected in the next period which means that there is no adjustment process towards long-run equilibrium when there is a short-term disturbance in imports. VECM results also indicate that there is uni-directional long-run causality running from imports to exports which prove the validity of import-led exports hypothesis for Turkey. Consequently, it can be stated that foreign trade deficit is not sustainable in the long-run. Besides, according to empirical results, it can be stated that macroeconomic policies that have been applied to have sustainable long-term foreign trade equilibrium are ineffective.

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