Nonlinear Bounds Testing Approach to Twin Deficit Hypothesis

Abstract

This study examines the relationship between current account and central government budget balance in Turkey by using data over the period 1998:Q1-2016:Q4 and NARDL (Nonlinear Autoregressive Distributed Lag) approach. Our findings indicate that there is cointegration among budget balance, current account balance and investment when the dependent variable is budget balance whereas no cointegrating relationship is found when the current account is employed as the dependent variable. We find that positive and negative changes in current account balance exert a significant effect on the budget balance in the long run without asymmetry. Twin deficit hypothesis is not supported since there is no cointegration when the current account is the dependent variable.