Current Account Deficit – Budget Deficit – Debt Sustainability Triangle in Turkey: A Data Based Causality Analysis

Abstract

In this study, we examine the causal patterns among current account deficit, budget deficit, government debt sustainability, and inflation in Turkey for the period 1975 – 2017. The strong integration of emerging economies such as Turkey to the global economy depends on determining the true causal relationship between macroeconomic dynamics that are considered in this study and the implementation of the related policies accordingly. Therefore, in order to create inductive causal patterns among the selected variables, we employ Directed Acyclic Graphs (DAGs) widely used in causal modeling. The resulting DAG patterns suggest that the current account deficit has a direct effect on the budget deficit which is a direct determinant of government debt sustainability. The findings also indicate that inflation is an indirect determinant of government debt sustainability through its direct effect on-budget deficit.

In this study, we examine the causal patterns among current account deficit, budget deficit, government debt sustainability, and inflation in Turkey for the period 1975 – 2017. The strong integration of emerging economies such as Turkey to the global economy depends on determining the true causal relationship between macroeconomic dynamics that are considered in this study and the implementation of the related policies accordingly. Therefore, in order to create inductive causal patterns among the selected variables, we employ Directed Acyclic Graphs (DAGs) widely used in causal modeling. The resulting DAG patterns suggest that the current account deficit has a direct effect on the budget deficit which is a direct determinant of government debt sustainability. The findings also indicate that inflation is an indirect determinant of government debt sustainability through its direct effect on-budget deficit.