The Dual Adjustment Approach with an Application to the Investment Function for Turkey (1963-2017)

Abstract

The dual adjustment approach enables us to consider separate dual co-movements of permanent and transitory components of time series variables and hence the possibility of dual adjustment. The common {filtered} trend concept is developed within the framework of dual adjustment approach and a simple test for the existence of such relationship is suggested for nonstationary macroeconomic variables. This paper investigates the dual adjustment with an application to the private sector fixed capital investment function by using the Turkish data over the 1963-2017 period. Our results indicated that private sector fixed capital investment and income, public sector fixed capital investment and macroeconomic instability are not cointegrated and hence they have spurious relationship. In contrast, according to the dual adjustment approach, these variables have a long run relationship. Additionally, it is shown that there are dual relationships between permanent and temporary components of private sector fixed capital investment and income. Furthermore, it is shown that there is no long run relationship between private sector fixed capital investments and public sector fixed capital investments but they are negatively related in the short run. In addition, it is concluded that macroeconomic instability is detrimental for private sector fixed capital investments only in the long run.