An Empirical Investigation on Current Account Balance, Inflation, and Real Exchange Rate
An Empirical Investigation on Current Account Balance, Inflation, and Real Exchange Rate

Summary/Abstract: It has been claimed that Turkey, as it is known, has set a low-interest rate and low exchange rate target, and has moved to a new economic model with the intention of both low inflation and current account surplus at the end of 2022. This study aims to find whether lowering the exchange rate and inflation will help reduce the current account deficit. In this study, using the Vector Auto-Regressive model and impulse-response analysis, the relationship between current account balance, inflation, and the real exchange rate is examined using monthly data for the period between 2003 and 2021. Empirical results suggest that there is no relation between the real exchange rate and current account balance in Turkey, except for small responses when looking at the impulse-response analysis. These results seem to be contradicting those who think that a current account surplus will be achieved by lowering the exchange rate in Turkey. The results of this study indicate that both variables, current account balance, and inflation, affect each other in the short term but the effects are fading away in the long run. Further, the study also finds that the exchange rate is an important factor that affects inflation rates due to its pass-through effect.

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