Re-examining Turkey's trade deficit with structural breaks: Evidence from 1989-2011

The goal of this paper is to examine the sustainability of the trade deficit of Turkey with cointegration techniques allowing for structural breaks. We follow Husted (1992) model, which shows that if a country’s exports and imports are cointegrated, and if the cointegrating vector is (1,-1), then its trade deficit is sustainable. First, classical cointegration tests indicate that exports and imports are cointegrated, but the cointegrating vector significantly differs from (1,-1). Next, the existence of cointegration is confirmed with an alternative method proposed by Silvestre and Sanso (2006) controlling for structural breaks. Our analysis detects two breaks in the cointegration relationship on 2001:01, and 2008:09, coinciding with economic crises. We show that since 2001, Turkish trade deficit has not been sustainable in the strong form, and after 2008, the country has moved away from sustainability. Based on our analysis, the sustainability of Turkey’s widening trade deficit is highly doubtful.