Dynamic linkages of current account deficits and unemployment: evidence from Turkey

In this paper, we empirically test the causal relationship between current accountdeficits and unemployment in Turkey over 2000Q1–2012Q1. Using Johansenco-integration and Granger-causality analyses based on a corresponding vector error correction model, we studied many alternative specifications of the nexus between unemployment and external deficits in an open macroeconomyenvironment. Our results reveal the presence of unidirectional causality runningfrom current account deficits to unemployment. Furthermore, based on theimpulse response variance decomposition analysis, we find that unemploymentexplains little variation of current account deficits, although current accountdeficits explain a substantial fraction of the variation in unemployment. Weinterpret these findings as evidence of the structural sources of unemployment being embedded under the deepening external fragility of the Turkish economyover the 2000s.