- **Oil prices have a negative effect on the current account.** Consistent with the Turkish dependence on oil imports, the result suggests that 10 percent increase in oil prices on average worsens the CAB by roughly 0.1 percent of GDP.

- **Past FDI inflows have a negative effect on the current account,** which is consistent with dynamics in Turkey over the past 15 years.  An increase in FDI of 1 percent of GDP seem to increase the CAD by 0.34 percent of GDP. This suggests the potentially high import content of FDI, including foreign inputs and capital and potentially a significant amount of profits repatriated by foreign owners.

- **Past NFA has a positive effect on the CAB.** The estimated coefficient (0.02) is close to what is found in the literature for other developing and emerging markets (0.02-0.04). This is consistent with the cumulative negative NFA in the past shown in Figure 20 having contributed to the current account deficit. Yet, the relationship may change in the future if NFA decrease further. On a related note, Catao and Milesi-Ferreti (2014) suggests that countries with net foreign liabilities in excess of 50 percent of GDP are associated with steeper crisis risk.

- **Higher inflation volatility increases the CAB.** The precautionary motives for saving are amplified, which tend to have a positive impact on the CAB. This is relevant after the recent fall of the Turkish lira which will lead to an increase in inflation volatility in the short-term.

- **Higher global uncertainty has a positive effect on the current account.** This is in line with the positive impact of uncertainty on saving and the negative impact on investment due to precautionary behavior of risk-averse households and the asymmetric nature of firms’ adjustment costs. Moreover, higher global uncertainty is associated with lower global liquidity and lower availability of foreign capital for financing current account deficit.

- **The estimated CAB persistence is at the lower bound (0.14) typically found in the literature** (0.1-0.59),<sup>3</sup> implying faster adjustment of the current account balance to transitory shocks, in line with the observed dynamics of the CAB. Conceptually, lower persistence implies higher flexibility of the CAB to externally smooth shocks to domestic saving and investment and a higher capacity of the country to maintain a current account deficit since, with lower persistence, they tend to adjust faster (Taylor, 2002). Lower persistence has been associated with increased financial openness and higher exposure to capital flows (Taylor, 2002), as well as with more flexible exchange rate regimes (Ghosh et al., 2014; Martin, 2016).

**The baseline specification performs well on average** : the difference between the implied current account balance and the observed balance is small at annual and five-year average levels throughout the period (Figure 24 and Figure 25), with in-sample R2 above 0.6. We compute non-overlapping five-year averages as the standard measure of the medium-term movements in the CAB (IMF 2013). The model captures well the peaks and troughs of the current account balance over the studied period, though it tends to slightly under-predict their magnitude. The recent CA deterioration is also captured well.

Alternate specifications do not indicate the base specification is mis-specified. In the alternative specification of column 2, Table 2, we broke down credit into credit to households and to non-financial corporations and their coefficients are also negative. In the third specification (column 3) we use the public-sector balance instead of public expenditures and its estimated coefficient is negative, but non-significant. This may be consistent with a low budget deficit that has been stable in the last years. Finally, the fourth specification (column 4) excludes the real effective exchange rate as in the current account determinants specification of IMF (2013) but all other coefficients do not vary significantly.

> 3 See Taylor (2002) and Table 1 and Table A2 in Beidas-Strom and Cashin (2011) for an overview of the literature.

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