Advances in Economics and Business Vol. 4(2), pp. 102 - 116
DOI: 10.13189/aeb.2016.040204
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Does Credit Growth ‘Cause' Current Account Deficits? Evidence from Turkey


Aylin Soydan *
Faculty of Economics and Administrative Sciences, Okan University, Turkey

ABSTRACT

The extent of current account deficits in the Turkish economy has reached alarming levels in the past few years. Beside other arguments, one line of debate has recently been put forward by the Central Bank of the Republic of Turkey; it is stated that credit expansion in the economy has been one of the leading reasons behind the large current account deficits. When the annual credit growth reached the level over 30 per cent in 2010, concerns regarding financial and macroeconomic stability were pronounced, and some policy measures were taken by the central bank in order to bring credit growth down to more ‘sustainable' levels, as stated. This study aims to empirically analyse the relationship between current account balances and domestic credit dynamics in the case of Turkey. To this end, the paper employs the ARDL bounds testing methodology and investigates causality implications between domestic credit and external balance variables. The empirical findings of the study suggest Granger causality running from domestic credit growth to external balances.

KEYWORDS
Credit Growth, Current Account Deficits, ARDL, Bounds Testing, Causality

Cite this paper
Aylin Soydan . "Does Credit Growth ‘Cause' Current Account Deficits? Evidence from Turkey." Advances in Economics and Business 4.2 (2016) 102 - 116. doi: 10.13189/aeb.2016.040204.