AN EMPIRICAL INVESTIGATION OF THE FELDSTEIN CHAIN FOR TURKEY

Abstract

The Feldstein chain which argues that an increase in the government deficit pushes the interest rate sup, which in turn attracts foreign capital and strengthens the domestic currency driving the current account balance into deficits, has been the most important explanation fort he controversial twin deficits phenomenon. In thes paper, where the validity of the Feldstein chain is investigated for Turkey, we could not find any evidence on the Feldstein chain. The real current account deficit is found to cause both the real Exchange rate and the real interest rate in the short run which is not meaningful fort he government deficit to the real current account deficit.

Keywords

• Feldstein Chain, Twin Deficits, Cointegration, Causality Tests.