Sustainability of Current Account Deficits in Turkey: Markov Switching Approach

Countries may face debt problems for periods when the long-run solvency condition about current account deficits holds. Using Markov Switching model, the econometric methodology proposed in this study allows us to distinguish periods that are associated with unsustainable outcomes from those in which the solvency condition holds. Analyzing Turkey’s current account deficits between 1987:4 and 2010:4, it is found through defining three regimes that probability of persistency in the sustainable path is 0,696 whereas the probabilities of transition to the crisis path and to the unsustainable path from the sustainable path are 0,125 and 0,178 respectively. Also, Turkey seems to be in a crisis regime since the first quarter of 2010. This may be an informative alert for the Turkish economy about oncoming balance of payments crisis in a year.