Application of the twin-deficits hypothesis to the Turkish case

Abstract

This study detects the twin-deficits hypothesis, the mutual effects of government budget deficits and merchandise trade deficits on each other through real interest rates and real effective exchange rates, in the Turkish economy. One-sided Granger causality analysis and Ordinary Least Squares (OLS) regressions for multivariate analysis for each are used for 1987-92 monthly data. The government budget deficits are found to affect trade deficits not directly, but through the mechanism over real interest rates and real effective exchange rates. Nevertheless, the merchandise trade deficits seem to affect budget deficits directly.