TEST OF ‘TWIN DEFICIT HYPOTHESIS’ FOR TURKEY: AN ANALYSIS FOR 2001-2014 PERIOD

Budget deficit and current deficit issues are critical macro economic variables for most economies. Therefore, there has been a large number of academic work on this field. This study examines the causality relation between budget deficit, current deficit, exchange rate and interest rate in Turkey for 2001-2014 period. In empirical part of the work, we employ Toda Yamato causality test and we do not find any support for the twin deficit hypothesis. Our findings indicate that there is a unidirectional causality running from current deficit to budget deficit and a bi-directional causality between interest rate and budget deficit. We also find that there is a unidirectional causality running from exchange rate to budget deficit.