The Relationship between Current Account Balance and Financial Account: An Empirical Study for Turkey

Abstract

The present paper examines the causality between current account balance and financial account and three components of financial account namely direct investments, other investments and portfolio investments over the period of 1998: 12014: 4 in Turkey which has a continuous current account deficit and an important capital inflow. Causality tests were implemented through Toda-Yamamoto and Hatemi-J approaches. Empirical findings indicate a unilateral causality running from financial account and portfolio account to current account balance. Thus, it should be a priority to reconsider policies regarding financial account balance with a particular attention to portfolio investment and also to implement some policy measures to attract more direct investments rather than portfolio investments for the ultimate purpose of reducing high current account deficit.