Twin Deficit Problem and Feldstein – Horioka Hypothesis in Turkey: ARDL Bound Testing Approach an Investigation of Causality

International Research Journal of Finance and Economics, sa.74, ss.30-45, 2011 (Hakemli Dergi)

The purpose of this study is to investigate the twin deficit problem for the Turkish

economy using bounds testing approach known as ARDL (autoregressive distributed lag)

to cointegration method and Toda and Yamamoto (1995) Granger causality test. The study

covers the annual data from 1974 to 2010. The cointegration test results suggest that the

variables are moving together in the long run. The positive value on the budget deficit

coefficient implies that Turkey has a twin deficit problem. The presence of twin deficit has

also been supported by the Toda-Yamamota causality test results. As expected, the negative

and less than 1 investment coefficient indicates Feldstein-Horioka hypothesis holds.

Further, it indicates that Turkey could not well-integrated into the international capital

markets with the model revealing that one fifth of the investments are financed through

foreign savings