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The Analysis of the Causal Relationship Between Budget Balance and Current Account Balance by MGARCH Methodology: Turkey Experience

Year 2014, Volume: 14 Issue: 2, 71 - 79, 29.06.2014

Pelin Varol İyidoğan

https://doi.org/10.18037/ausbd.62277
Cited By: 3

Abstract

The aim of the study is to explore the causality relationship between the budget balance and the current account balance of Turkey. Differently from the literature, the causality relationship is examined by considering the volatility of the variables in question. Accordingly, the multivariate GARCH (MGARCH) methodology for modelling the volatility and 1987-2005 quarterly data of Turkey are utilized. Depending upon the results of the selection criterion and autocorrelation tests, constant conditional correlation (CCC) model is determined as the appropriate MGARCH model for the analysis. The results of the Granger causality test applied on the CCC model find no evidence that supports the effect of the budget deficit on the current account deficit. Contrarily, the current account balance is found to be influential both on the budget balance and the volatility of the budget balance. Therefore it should be considered that the policies regarding the current account balance affects the budget balance as well.

Keywords

Bütçe Açığı Cari İşlemler Açığı Volatilite GARCH Nedensellik

References

  • Abell, J.D. (1990). Twin Deficits During the 1980’s: An Empirical Investigation. Journal of Macreconomics, 12(1), 81-96.
  • Bachman, D.D. (1992). Why Is the Current Account Deficit So Large? Evidence From Vector Autoreg- ressons. Southern Economic Journal, 59(2), 232- 240.
  • Baharumshah, A.Z., Lau E. & Khalid A. (2006). Tes- ting Twin Deficits Hypothesis Using VARs and Va- riance Decomposition. Journal of the Asia Pacific Economy, 11(3), 331-354.
  • Beetsma, R., Giuliodori, M., & Klaassen, F. (2008). The Effects of Public Spending on Trade Balances in the European Union. Journal of the European Eco- nomic Association, 6(2-3), 1-25.
  • Bollerslev, T. (1990). Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivaria- te Generalized ARCH Model. Review of Economics and Statistics, 72, 498-505.
  • Darrat, A.F. (1988). Have Large Budget Deficits Cau- sed Rising Trade Deficits. Southern Economic Jour- nal, 54(4), 879-887.
  • Datta, K. & Mukhopadhyay, C.K. (2010). Twin Deficits Phenomenon in Maldives: Spectral and Time Do- main Analysis of Time Series, The IUP Journal of Applied Economics, 9, 98-125.
  • Dibooğlu, S. (1997). Accounting for US Current Ac- count Deficits: An Empirical Investigation. Applied Economics, 29, 787-793.
  • Enders, W. & Lee, B.S. (1990). Current Account and Budget Deficits: Twin or Distant Cousins? Review of Economics and Statistics, 72, 373-381.
  • Engle, R.F. (2002). Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregres- sive Conditional Heteroskedasticity Models. Journal of Business and Economic Statistics, 20, 339- 350.
  • Engle, R.F., & Sheppard, K. (2001). Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH. NBER Working Paper 8554,Cambridge: The National Bureau of Economic Research.
  • Fountas, S., Karanasos, M. & Kim, J. (2006). Inflati- on Uncertainty, Output Growth Uncertainty and Macroeconomic Performance. Oxford Bulletin of Economics and Statistics, 68(3), 319-343.
  • Grier, K.B. & Perry, M.J. (2000). The Effects of Real and Nominal Uncertainty of Inflation and Output Growth: Some GARCH-M Evidence. Journal of Applied Econometrics, 15, 45-58.
  • Hakro, A.N. (2009). Twin Deficits Causality Link- Evidence From Pakistan. International Research Journal of Finance and Economics, 24, 54-70.
  • Hasanov, M. & Omay, T. (2011). The Relationship Bet- ween Inflation, Output Growth and Their Uncer- tainties: Evidence From Selected CEE Countries. Emerging Markets Finance and Trade, 47, 5-20.
  • Islam, M.F. (1998). Brazil’s Twin Deficits: An Empiri- cal Examination. Atlantic Economic Journal, 26(2), 121-129.
  • Jondeau, E., Poon, S., & Rockinger, M. (2007). Finan- cial Modeling Under Non-Gaussian Distributions. New York, USA: Springer Finance.
  • Kalou, S., & Paleologou S-M. (2011). The Twin Deficits Hypothesis: Revisiting an EMU Country. Journal of Policy Modelling, 34, 230-241.
  • Katırcıoğlu, S.T., Feth, S., & Feth, M.D. (2009). Twin Deficits Phenomenon in Small İslands: An Empi- rical Investigation by Panel Data Analysis. Applied Economics Letters, 16(15), 1569-1573.
  • Kaufmann, S., Scharler, J. & Winckler, G. (2002). The Austrian Current Account Deficit Driven by Twin Deficits or by Intertemporal Expenditure Allocati- on? Empirical Economics, 27, 549-542.
  • Kim, C-H., & Kim D. (2006). Does Korea Have Twin Deficits?. Applied Economic Letters, 13, 675-680.
  • Latif-Zaman, N., & DaCosta, M.N. (1990). The Bud- get Deficit and the Trade Deficit: Insights Into This Relationship. Eastern Economic Journal, 16(4), 349-354.
  • Marinheiro, C.F. (2008). Ricardian Equivalence, Twin Deficits, and the Feldstein-Horioka Puzzle in Egypt. Journal of Policy Modeling 30, 1041-1056.
  • Mukhtar, T., Zakaria, M., & Ahmed, M. (2007). An Empirical Investigation for the Twin Deficit Hypothesis in Pakistan. Journal of Economic Coo- peration, 28(4), 63-80.
  • Normandin, M. (1999). Budget Deficit Persistence and the Twin Deficit Hypothesis. Journal of Internatio- nal Economics, 49, 171-193.
  • Onafowora, O.A., & Owoye, O. (2006). An Empirical Investigation of Budget and Trade Deficits: The Case of Nigeria. The Journal of Developing Areas, 39(2), 153-174.
  • Rosensweig, J.A., & Tallman, E.W. (1993). Fiscal Po- licy and Trade Adjustment: Are The Deficits Really Twins?. Economic Inquiry, 31, 580-594.
  • Silvennoinen, A., & Terasvirta, T. (2008). Multivari- ate Garch Models. SSE/ EFI Working Paper Series in Economics and Finance, 669, In Eds. Andersen T.G., Davis R.A., Kreiss J.-P. & Mikosch T., Hand- book of Financial Time Series, New York: Springer.
  • Summers, L.H. (1988). Tax Policy and International Competitiveness, in J. Frenkel, (Ed) International Aspects of Fiscal Policies, 349-375, Chicago: UP.
  • Telatar, E. (2011). Türkiye’de Cari Açık Belirleyicileri ve Cari Açık-Krediler İlişkisi. Bankacılar Dergisi, 78, 22-34, İstanbul: Türkiye Bankalar Birliği.
  • Vamvoukas, G.A. (1999). The Twin Deficits Phenome- non: Evidence from Greece. Applied Economics, 31, 1093-1100.
  • Varol İyidoğan, Pelin (2011). İkiz Açıklar Hipotezi: Türkiye Deneyimi. (Unpublished Ph.D. Thesis). Hacettepe University/Graduate School of Social Sciences, Ankara.

Year 2014, Volume: 14 Issue: 2, 71 - 79, 29.06.2014

Pelin Varol İyidoğan

https://doi.org/10.18037/ausbd.62277
Cited By: 3

Abstract

References

  • Abell, J.D. (1990). Twin Deficits During the 1980’s: An Empirical Investigation. Journal of Macreconomics, 12(1), 81-96.
  • Bachman, D.D. (1992). Why Is the Current Account Deficit So Large? Evidence From Vector Autoreg- ressons. Southern Economic Journal, 59(2), 232- 240.
  • Baharumshah, A.Z., Lau E. & Khalid A. (2006). Tes- ting Twin Deficits Hypothesis Using VARs and Va- riance Decomposition. Journal of the Asia Pacific Economy, 11(3), 331-354.
  • Beetsma, R., Giuliodori, M., & Klaassen, F. (2008). The Effects of Public Spending on Trade Balances in the European Union. Journal of the European Eco- nomic Association, 6(2-3), 1-25.
  • Bollerslev, T. (1990). Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivaria- te Generalized ARCH Model. Review of Economics and Statistics, 72, 498-505.
  • Darrat, A.F. (1988). Have Large Budget Deficits Cau- sed Rising Trade Deficits. Southern Economic Jour- nal, 54(4), 879-887.
  • Datta, K. & Mukhopadhyay, C.K. (2010). Twin Deficits Phenomenon in Maldives: Spectral and Time Do- main Analysis of Time Series, The IUP Journal of Applied Economics, 9, 98-125.
  • Dibooğlu, S. (1997). Accounting for US Current Ac- count Deficits: An Empirical Investigation. Applied Economics, 29, 787-793.
  • Enders, W. & Lee, B.S. (1990). Current Account and Budget Deficits: Twin or Distant Cousins? Review of Economics and Statistics, 72, 373-381.
  • Engle, R.F. (2002). Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregres- sive Conditional Heteroskedasticity Models. Journal of Business and Economic Statistics, 20, 339- 350.
  • Engle, R.F., & Sheppard, K. (2001). Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH. NBER Working Paper 8554,Cambridge: The National Bureau of Economic Research.
  • Fountas, S., Karanasos, M. & Kim, J. (2006). Inflati- on Uncertainty, Output Growth Uncertainty and Macroeconomic Performance. Oxford Bulletin of Economics and Statistics, 68(3), 319-343.
  • Grier, K.B. & Perry, M.J. (2000). The Effects of Real and Nominal Uncertainty of Inflation and Output Growth: Some GARCH-M Evidence. Journal of Applied Econometrics, 15, 45-58.
  • Hakro, A.N. (2009). Twin Deficits Causality Link- Evidence From Pakistan. International Research Journal of Finance and Economics, 24, 54-70.
  • Hasanov, M. & Omay, T. (2011). The Relationship Bet- ween Inflation, Output Growth and Their Uncer- tainties: Evidence From Selected CEE Countries. Emerging Markets Finance and Trade, 47, 5-20.
  • Islam, M.F. (1998). Brazil’s Twin Deficits: An Empiri- cal Examination. Atlantic Economic Journal, 26(2), 121-129.
  • Jondeau, E., Poon, S., & Rockinger, M. (2007). Finan- cial Modeling Under Non-Gaussian Distributions. New York, USA: Springer Finance.
  • Kalou, S., & Paleologou S-M. (2011). The Twin Deficits Hypothesis: Revisiting an EMU Country. Journal of Policy Modelling, 34, 230-241.
  • Katırcıoğlu, S.T., Feth, S., & Feth, M.D. (2009). Twin Deficits Phenomenon in Small İslands: An Empi- rical Investigation by Panel Data Analysis. Applied Economics Letters, 16(15), 1569-1573.
  • Kaufmann, S., Scharler, J. & Winckler, G. (2002). The Austrian Current Account Deficit Driven by Twin Deficits or by Intertemporal Expenditure Allocati- on? Empirical Economics, 27, 549-542.
  • Kim, C-H., & Kim D. (2006). Does Korea Have Twin Deficits?. Applied Economic Letters, 13, 675-680.
  • Latif-Zaman, N., & DaCosta, M.N. (1990). The Bud- get Deficit and the Trade Deficit: Insights Into This Relationship. Eastern Economic Journal, 16(4), 349-354.
  • Marinheiro, C.F. (2008). Ricardian Equivalence, Twin Deficits, and the Feldstein-Horioka Puzzle in Egypt. Journal of Policy Modeling 30, 1041-1056.
  • Mukhtar, T., Zakaria, M., & Ahmed, M. (2007). An Empirical Investigation for the Twin Deficit Hypothesis in Pakistan. Journal of Economic Coo- peration, 28(4), 63-80.
  • Normandin, M. (1999). Budget Deficit Persistence and the Twin Deficit Hypothesis. Journal of Internatio- nal Economics, 49, 171-193.
  • Onafowora, O.A., & Owoye, O. (2006). An Empirical Investigation of Budget and Trade Deficits: The Case of Nigeria. The Journal of Developing Areas, 39(2), 153-174.
  • Rosensweig, J.A., & Tallman, E.W. (1993). Fiscal Po- licy and Trade Adjustment: Are The Deficits Really Twins?. Economic Inquiry, 31, 580-594.
  • Silvennoinen, A., & Terasvirta, T. (2008). Multivari- ate Garch Models. SSE/ EFI Working Paper Series in Economics and Finance, 669, In Eds. Andersen T.G., Davis R.A., Kreiss J.-P. & Mikosch T., Hand- book of Financial Time Series, New York: Springer.
  • Summers, L.H. (1988). Tax Policy and International Competitiveness, in J. Frenkel, (Ed) International Aspects of Fiscal Policies, 349-375, Chicago: UP.
  • Telatar, E. (2011). Türkiye’de Cari Açık Belirleyicileri ve Cari Açık-Krediler İlişkisi. Bankacılar Dergisi, 78, 22-34, İstanbul: Türkiye Bankalar Birliği.
  • Vamvoukas, G.A. (1999). The Twin Deficits Phenome- non: Evidence from Greece. Applied Economics, 31, 1093-1100.
  • Varol İyidoğan, Pelin (2011). İkiz Açıklar Hipotezi: Türkiye Deneyimi. (Unpublished Ph.D. Thesis). Hacettepe University/Graduate School of Social Sciences, Ankara.
There are 32 citations in total.

Details

Primary Language English
Journal Section Articles
Authors

Pelin Varol İyidoğan

Publication Date June 29, 2014
Submission Date January 1, 2014
Published in Issue Year 2014 Volume: 14 Issue: 2

Cite

APA Varol İyidoğan, P. (2014). The Analysis of the Causal Relationship Between Budget Balance and Current Account Balance by MGARCH Methodology: Turkey Experience. Anadolu Üniversitesi Sosyal Bilimler Dergisi, 14(2), 71-79. https://doi.org/10.18037/ausbd.62277

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