Is the debtor solvent : the case for Turkey

• Author: Tuba Baskonus Direkci
• Position: Gaziantep University Facult of Economic and Administrative Sciences
• Pages: 378-384

Page 378

Introduction

Equilibrium models imply that the real value of debt in the hands of the public must equal the expected present-value of surpluses. Empirical models of fiscal policy typically do not impose this condition and often do not even include debt. Absence of debt from empirical models can produce non-invertible representations, obscuring the true present-value relation, even if it holds in the data (Chung at al ,2007). There is a broad range of literature on economic crises witnessed, with the recent experiences we had in Far East Asia, Argentina, Mexico, Brazil and Turkey. Although there are still debates on the triggering mechanisms (Burnside , Eichenbaum and Rebelo 2001), it is a common accepted fact that, large and consistent fiscal deficits, market imperfections, over burden of foreign debt and shallow fiscal markets are among the factors contributing. As in the case of Ricardian equivalence, a debt-financed reduction in government revenue should not effect the exchange rate or the current account shows very conflicting conclusions. (Elmendorf and Mankiw 1998). There are also issues of arbitrariness in positive public finance, which is dominated by the delegation of political control ( Persson and Tabellini 1999). International market borrowing dominated by IMF, for most emerging markets mostly led to huge output declines followed by a currency crises (Hutchison 2001). Besides these debates on stabilization and growth issues, it is a common belief that, external debt issues should not be taken in isolation from the general macroeconomic setting. Foreign debt has very close linkages among fiscal budget, foreign reserves, and overall balance of payments (Feldstein, 1992) and also Edwards(2008) wants to explain the crises effets on Latin America.

In this research we aim to see the interactions among, economic growth rate impacts on trade balances, on exchange rates and external debt and eventually on internal debt. The second or twin aim is to see the short or long term effects of innovations under the models

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tested. Before covering our formal model more rigorously, we would like to show some recent macroeconomic developments in Turkey.

Recent financial crises in Turkey have shared the following features:

- Large internal debt

- Large external debt

- Shallow financial markets

- Persistent high inflation rates

- Evolved through a complicated interaction of domestic financial and real sectors x Sharp growth slowdown and very high devaluation's

Starting with 1990's Turkey became a relatively more outward oriented country, where he is more vulnerable to international market developments. This paper starts with the conventional open market economy models and its relevance to Turkey. But major part of the paper will be devoted to providing a rationale for the macro interactions among macro aggregates, which can trigger imbalances.

The classical question of economic growth is why there are structural differences among economic growth rates among countries. Turkey in this respect seems to be very lucky achieving a 4.3 percent average...