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

Özet

Öz The aim of the study is to explore the causality relationshipbetween the budget balance and the current accountbalance of Turkey. Differently from the literature,the causality relationship is examined by consideringthe volatility of the variables in question. Accordingly,the multivariate GARCH (MGARCH) methodologyfor modelling the volatility and 1987-2005 quarterlydata of Turkey are utilized. Depending upon the resultsof the selection criterion and autocorrelation tests,constant conditional correlation (CCC) model is determinedas the appropriate MGARCH model for theanalysis. The results of the Granger causality test appliedon the CCC model find no evidence that supportsthe effect of the budget deficit on the current accountdeficit. Contrarily, the current account balance is foundto be influential both on the budget balance and thevolatility of the budget balance. Therefore it should beconsidered that the policies regarding the current accountbalance affects the budget balance as well.