Twin Deficit Hypothesis and Reverse Causality: An Empirical Study on Turkish EconomyMeltem Duğru
The twin deficit hypothesis is a hypothesis suggesting that the current deficit and the budget deficit move together. According to this hypothesis, the existence of a relationship between two variables is handled in different ways. While the Traditional Keynesian View argues that there is causality from the budget deficit to the current deficit, the Ricardian Equivalence Hypothesis claims that there is no relationship between two variables. The Current Account Targeting view, named by Summers, is that there is causality from the current deficit to the budget deficit, contrary to the Keynesian theory. The twin deficit, affecting both developed and developing countries as a result of liberalization experienced in the 1980s, continues to be the problem of countries today. In this study, Turkey’s current deficit and budget deficit were investigated whether there was any interaction between these variables. In order to determine the direction and degree of this interaction, it was tried to obtain a result about the existence of the concept of reverse causality within the framework of the “twin deficit hypothesis” between 2009: 1Q and 2020: 2Q. For the budget deficit and current deficit data compiled as time series, cointegration analysis and the bound test based on the Autoregressive Distributed Lag model approach were applied. Then, the direction of causality was determined with the Error Correction Model. As a result of the analysis, it was determined that the direction of the relationship between two variables is negative in the long term and positive in the short term. According to these results, while the Current Account Targeting view is supported by the short term findings, the Keynesian view is rejected.
İkiz Açık Hipotezi ve Ters Nedensellik: Türkiye Ekonomisi Üzerine Ampirik Bir ÇalışmaMeltem Duğru
İkiz açık hipotezi, cari açık ve bütçe açıklarının birlikte hareket ettiğini ileri süren bir hipotezdir. Bu hipoteze göre iki değişken arasındaki ilişkinin varlığı farklı şekillerde ele alınmaktadır. Geleneksel Keynesyen Görüş, bütçe açığından cari açığa doğru bir nedensellik olduğunu savunurken, Ricardocu Denklik Hipotezi iki değişken arasında herhangi bir ilişkinin olmadığını iddia etmektedir. Lawrence H. Summers tarafından adlandırılmış olan Cari İşlemler Hedeflemesi görüşü ise, Keynesyen teorinin aksine cari açıktan bütçe açığına doğru bir nedensellik olduğu yönündedir. 1980’li yıllarda yaşanan serbestleşme sonucunda hem gelişmiş hem de gelişmekte olan ülkeleri etkileyen ikiz açık, günümüzde ülkelerin sorunu olmaya devam etmektedir. Bu çalışmada, Türkiye’nin cari açık ve bütçe açığı değişkenleri arasında herhangi bir etkileşimin olup olmadığı araştırılmıştır. Bu etkileşimin yönünün ve derecesinin belirlenmesi için 2009:1Q ve 2020:2Q dönemleri arasında ‘ikiz açık hipotezi çerçevesinde ters nedensellik’ kavramının varlığı ile ilgili bir sonuç elde edilmeye çalışılmıştır. Zaman serileri olarak derlenen bütçe açığı ve cari açık verileri için eşbütünleşme analizi ve Otoregresif Dağıtılmış Gecikme modeli yaklaşımına dayalı sınır testi uygulanmıştır. Ardından Hata Düzeltme Modeli kapsamında nedenselliğin yönü belirlenmiştir. Yapılan analizler sonucunda iki değişken arasındaki ilişkinin yönünün uzun dönemde negatif, kısa dönemde pozitif olduğu tespit edilmiştir. Bu sonuçlara göre, Cari İşlemler Hedeflemesi görüşü kısa dönem bulguları ile desteklenirken, Keynesyen görüş reddedilmektedir.
The twin deficit hypothesis is a hypothesis suggesting that the current deficit and the budget deficit move together. While the Traditional Keynesian View argues that there is causality from the budget deficit to the current deficit, the Ricardian Equivalence Hypothesis claims that there is no relationship between two variables. According to the Ricardian view, if the economic administration reduces taxes or goes into borrowing, it will increase the savings of individuals. Because individuals are rational, they are aware that tax cuts in the current period will lead to tax increases in the future. For this reason, they will prefer to save rather than spend on consumption. Another view on the twin deficit is the current account targeting view which is the subject of our study. The current account targeting view, named by Summers, is that, contrary to the Keynesian theory, there is causality from the current deficit to the budget deficit. Summers (1988, p. 349- 386) stated in his study that as a result of a large capital flows, the debts of countries will accumulate and indirectly cause a deficit in the budget.
Remembering the concept of the twin deficit after the 2008 financial crisis has led to more research on this issue. Budget deficit and current deficit, which have been among the problems experienced for years, are the variables of the twin deficit hypothesis. Today, still being in the nature of a problem for Turkey indicates that these variables need to be investigated. Therefore, it is important to know whether there is any interaction between the budget deficit and current deficit variables for Turkey which is an emerging economy. If there is an interaction, the direction and degree of this interaction must be determined. Thus, it is expected to provide more positive results of the economic policies to be implemented in Turkey and decisions to be taken in this direction.
Most of the studies in the literature investigated how these two variables affect each other and reached various results. In this study, the Current Account Targeting view is analyzed, which inquires whether there is causality from the current deficit to the budget deficit. The Current Account Targeting view within the framework in the period between 2009 and 2020 were investigated whether the current deficit affects the budget deficit in Turkish economy. In the study, first, the stationarities of the series were examined, and their levels were determined. In the next stage, for the budget deficit and current deficit data are compiled as time series, cointegration analysis and the bound test based on the Autoregressive Distributed Lag model approach were applied. As a result of these tests, long-term results between the variables of current deficit and budget deficit have been reached. Then, the Error Correction Model (ECM) was applied and the short-term results between two variables were interpreted within the scope of this model.
As a result of the analysis, a statistically significant relationship was found between two variables in the long and short term. Although the direction of the relationship between the current deficit and the budget deficit was negative in the long term, it was found to be significant. When the short term was analyzed, a positive and significant relationship was found. It was determined that while the current deficit variable affects the budget deficit in the same direction in the short term, it affects in the opposite direction in the long term in Turkey. According to the results of the analysis, it has been confirmed that the Current Account Deficit Targeting view, which is not supported in the long term, is supported in the short term.