Examining the Twin Deficits Hypothesis for the Turkish Economy with a Special Emphasis on the Quantitative Easing Periods

The twin deficits hypothesis is an important topic for developing countries, like Turkey. The twin deficits hypothesis, which is defined as a co-movement of budget deficits and current account deficits, is examined for the Turkish economy, unlike the previous studies, with a special emphasis on an interaction of the twin deficits with the monetary policy effect of the FED. In this article, a two-step novel method is used for examining the effect of monetary policy decisions of the FED on short term deviations from long term equilibrium of the twin deficits, especially of the quantitative easing periods of the FED for the Turkish economy between 2002Q1-2018Q3. In the first step of the analysis, co-integration test is conducted for estimating the long term relationship between the variables. In the second step of the analysis, the effect of the quantitative easing periods on such long term relationship is examined. The obtained findings show that the global shocks have an important effect on the relationship between current account and budget deficit. The obtained findings show that the impact of the FED’s monetary policy is an important factor for the short-term deviations of the long term equilibrium of twin deficits