This project will constitute the main research area of CEE for a period of two and a half years starting from June 2011.

The purpose of the project is to develop empirical and theoretical models of an open, small emerging economy in order to understand the driving forces of the current account deficit. The models will scrutinize the role of terms of trade, competitiveness, fiscal and monetary policies, exchange rates, savings pattern and demographics, productivity and informality, both at business cycle frequencies and trend movements. The Turkish economy will be the case in point.

Current account deficit is typically used as one of the main leading indicators for the future behavior of the Turkish economy despite the lack of a comprehensive study regarding the determinants of the current account balance. The purpose of this study is to fill in this gap by providing an exhaustive characterization of the relationship between the current account deficit in Turkey and a broad set of economic variables proposed by the theoretical and empirical literature. This study will complement and extend the previous research by (1) using a large and consistent macro-economic data set by including factors neglected by
previous research, (2) develop an econometric model to estimate separately the transitory (cyclical) and permanent (trend) relations between current account deficit and its determinants.

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