Financial Capital Inflows, Current Account Deficit and Economic Growth in Turkey

The presence and direction of the relationship between economic growth and current account balance is one of the most fundamental economic matters especially in developing countries. Some economists show that current account deficit arising from increasing import of capital good spurs faster economic growth. Contrarily, some group of researches detect that an increase in the rate of economic growth promotes imports of goods and services, which lead to a deterioration in the current account balance. Some economists also argue that there is a mutual relationship between economic growth and current account balance. This study aims to shed new lights on this controversial issue by examining the Turkish case. Accordingly, using data between 2003 and 2006, we analyse the relationship between economic growth and current account balance financed by capital flows. Empirical findings indicate that there is a bidirectional relationship between economic growth and current account deficit financed by capital inflows. Thus, stability of growth rates in Turkey depend on financing of current account deficit permanently.