The Relationship between Credit Volume and Current Account Deficit: A Dynamic Analysis for Turkey

Abstract

One of Turkey’s most important macroeconomic problems is persistent current account deficit. Credit volume has been shown as one of the basic determinants of current account rate, especially after the global financial crisis in Turkish economy. The Central Bank of Turkey has begun to implement the policy to ensure financial stability by slowing down credit volume in response to current account deficit affected by rapid credit expansion after the global financial crisis of 2008. In this study, we investigated the relationship between credit volume and current account deficit covering the period of 2005:Q1- 2015:Q3 employing Bound test approach, ARDL model and Kalman filter method. Bound test results suggest the existence of co-integration relationship between current account deficit and credit volume.  ARDL model results indicate that the credit volume is statistical significant and positively affects current account deficit in the short and long run. The results show that a 1 % increase in credit volume leads to nearly a 0.62 % increase in current account deficit. Kalman Filter method results indicate that the effect of credit volume on current account deficit increased after global financial crisis and started to decrease after 2013.