Growth-maximizing public debt in Turkey: An empirical investigation

  • 1 Aksaray University, Faculty of Economics and Administrative Sciences, Department of Economics, 68100, Aksaray, Turkey

Abstract

The aim of the paper is to empirically estimate the growth-maximizing debt-to-GDP ratio in the case of Turkey. To calculate the growth-maximizing debt-to-GDP ratio FMOLS, DOLS, and CCR estimators are used for the period from 1960–2013. According to the empirical findings the growth-maximizing debt-to-GDP ratio varies between 34.3% and 38.7%. Based on a comparison of these ratios to current data (29.1% for 2018), Turkey has the capacity for additional borrowing to achieve a growth-maximizing debt-to-GDP ratio. If this additional borrowing capacity is used for public investment with a return greater than the interest cost of the additional debt economic growth will be maximized and public debt sustainability supported.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Aghion, P., & Kharroubi, E. (2007). Cyclical macro policy and industry growth: The effect of counter-cyclical fiscal policy. (Working Paper.) Cambridge, MA: Harvard University. Retrieved from https://ideas.repec.org/p/red/sed008/837.html

  • Aizenman, J., Kletzer, K., & Pinto, B. (2007). Economic growth with constraints on tax revenues and public debt: Implications for fiscal policy and cross-country differences. (NBER Working Paper No. 12750). Retrieved from https://www.nber.org/papers/w12750.pdf

  • Ajayi, S. I., & Khan, M. S. (2000). External debt and capital flight in Sub-Saharan Africa. Washington, DC: IMF Institute.

  • Al-Zeaud, A. H. (2014). Public debt and economic growth: An empirical assessment. European Scientific Journal, 10(4), 148-158.

  • Aschauer, D. A. (2000). Do states optimize? Public capital and economic growth. The Annals of Regional Science, 34, 343-363. doi:10.1007/s001689900016

  • Asteriou, D., & Hall, S. G. (2015). Applied econometrics (3. b.). London: Palgrave.

  • Balassone, F., Francese, M., & Pace, A. (2011). Public debt and economic growth in Italy. (Economic History Working Papers No. 11). Retrieved from https://www.bancaditalia.it/pubblicazioni/quaderni-storia/2011-0011/QSEn_11.pdf

  • Baum, A., Checherita-Westphal, C. C., & Rother, P. (2013). Debt and growth: New evidence for the Euro. Journal of International Money and Finance, 32, 809-821. doi:10.1016/j.jimonfin.2012.07.004

  • Bökemeier, B., & Greiner, A. (2015). On the relation between public debt and economic growth: An empirical investigation. Economics and Business Letters, 4(4), 137-150.

  • Checherita-Westphal, C. C., Hallett, H. A., & Rother, P. (2012). Fiscal sustainability using growth-maximizing debt targets. (European Central Bank Working Paper Series No. 1472). Retrieved from https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1472.pdf

  • Checherita-Westphal, C. C., Hallett, H. A., & Rother, P. (2014). Fiscal sustainability using growth-maximizing debt targets. Applied Economics, 46(6), 638-647. doi:10.1080/00036846.2013.861590

  • Chowdhury, A. R. (2001). External debt and growth in developing countries: A sensitivity and causal analysis. (WIDER Discussion Paper No. 2001/95). Retrieved from https://www.wider.unu.edu/publication/external-debt-and-growth-developing-countries

  • Dickey, A. D., & Fuller, A. W. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366), 427-431. doi:10.2307/2286348

  • Dickey, A. D., & Fuller, A. W. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057-1072. doi:10.2307/1912517

  • Egbetunde, T. (2012). Public debt and economic growth in Nigeria: Evidence from Granger causality. American Journal of Economics, 2(6), 101-106. doi:10.5923/j. economics.20120206.02

  • Emmanuel, O. O. (2012). An empirical analysis of the impact of public debt on economic growth: Evidence from Nigeria 1975-2005. Canadian Social Science, 8(4), 154-161. doi:10.3968/j.css.1923669720120804.350

  • Ferreira, C. (2009). Public debt and economic growth: A Granger causality panel data approach. (Working Paper No. 2009/24, Department of Economics, School of Economics and Management, Technical University of Lisbon). Retrieved from https://www.repository.utl.pt/handle/10400.5/1863

  • Fseifes, E. A. K., & Warrad, T. M. (2020). The nonlinear effect of public debt on economic growth in Jordan over the period 1980–2018. International Journal of Business and Economics Research, 9(2), 60-67. doi:10.11648/j.ijber.20200902.11

  • Fuller, A. W. (1976). Introduction to statistical time series. New York: Wiley Publications.

  • Granger, C., & Newbold, P. (1974). Spurious regressions in econometrics. Journal of Econometrics, 2(2), 111-120.

  • Greiner, A. (2011). Economic growth, public debt and welfare: Comparing three budgetary rules. German Economic Review, 12(2), 205-222. doi:10.1111/j.1468-0475.2010.00516.x

  • Gujarati, D. N., & Porter, D. (2009). Basic econometrics. New York: Mc Graw-Hill International Edition.

  • Hayashi, F. (2000). Econometrics. Princeton: Princeton University Press.

  • International Monetary Fund World Economic Outlook Database. (2019). Retrieved from https://www.imf.org/en/Data

  • Kamps, C. (2005) Is there a lack of public capital in the European Union?. EIB Paper, European Investment Bank (EIB) Luxembourg, 10(1), 73-93.

  • Khanfir, W. (2019). Threshold effect of public debt on economic growth: An empirical investigation for selected North African countries. Economic Alternatives, 3, 429-436.

  • Lee, P. S., & Ng, L. Y. (2015). Public debt and economic growth in Malaysia. Asian Economic and Financial Review, 5(1), 119-126. doi:10.18488/journal. aefr/2015.5.1/102.1.119.126

  • Maddala, G. S., & Kim, I. (1999). Unit roots, cointegration, and structural change. Cambridge: Cambridge University Press.

  • Maitra, B. (2019). Macroeconomic impact of public debt and foreign aid in Sri Lanka. Journal of Policy Modeling, 41, 372-394. doi:10.1016/j.jpolmod.2019.03.002

  • Mencinger J., Aristovnik, A., & Verbic, M. (2014). The impact of growing public debt on economic growth in the European Union. Amfiteatru Economic Journal, 16(35), 403-414.

  • Mencinger, J., Aristovnik, A., & Verbic, M. (2015). Revisiting the role of public debt in economic growth: The case of OECD countries. (MPRA Paper No. 67704). Retrieved from http://inzeko.ktu.lt/index.php/EE/article/view/4551

  • Missale, A. (1997). Managing the public debt: The optimal taxation approach. Journal of Economic Surveys, 11(3), 235-265. doi:10.1111/1467-6419.00033

  • Montanino, A., & Mrsnik, M. (2004). Long-term sustainability of public finances in EU countries: Where do we stand? Economic analysis from the European Commission’s Directorate-General for Economic and Financial Affairs, 4(1), 1-7.

  • Nantwi-Owusu, V., & Ericson, C. (2016). Public debt and economic growth in Ghana. African Development Review, 28(1), 116-126. doi:10.1111/1467-8268.12174

  • Narayan, K. P. (2005). The saving and investment nexus for China: Evidence from cointegration tests. Applied Economics, 37(17), 1979-1990. doi:10.1080/00036840500278103

  • Nelson, R. C., & Plosser, L. C. (1982). Trends and random walks in macroeconmic time series. Journal of Monetary Economics, 10, 139-162.

  • Onafowora, O., & Owoye, O. (2019). Public debt, foreign direct investment and economic growth dynamics: Empirical evidence from the Caribbean. International Journal of Emerging Markets, 14(5), 769-791. doi:10.1108/IJOEM-01-2018-0050

  • Panizza, U., & Presbitero, F. A. (2014). Public debt and economic growth: Is there a causal effect?. Journal of Macroeconomics, 41, 21-41. doi:10.1016/j.jmacro.2014.03.009

  • Park, Y. J. (1992). Canonical cointegrating regressions. Econometrica, 60(1), 119-143.

  • Pesaran, M. H. (2015). Time series and panel data econometrics. Oxford: Oxford University Press.

  • Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. Retrieved from https://doi.org/10.1002/jae.616

  • Phillips, P. C., & Hansen, E. B. (1990). Statistical inference in instrumental variables regression with I (1) processes. The Review of Economic Studies, 57, 99-125. doi:10.2307/2297545

  • Phillips, P. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346. doi:10.2307/2336182

  • Pradhan, R. (2020). Growth maximizing fiscal rule targets in India. The Singapore Economic Review. doi:10.1142/S021759081950067X

  • Rais, I. S., & Anwar, T. (2012). Public debt and economic growth in Pakistan: A time series analysis from 1972 to 2010. Academic Research International, 2(1), 535-544.

  • Saikkonen, P. (1992). Estimation and testing of cointegrated systems by an autoregressive approximation. Econometric Theory, 8(1), 1-27. doi:10.1017/S026646660- 0010720

  • Sanusi, K. A., Hassan, A. S., & Meyer, D. F. (2019). Non-linear effects of public debt on economic growth in Southern Africa Development Community (SADC) countries. International Journal of Economics and Management, 13(1), 193-202. doi:10.15407/ dse2019.03.099

  • Scharlek, A. (2004). Debt and economic growth in developing and industrial countries. (Working Paper, Lund University Department of Economics, No. 34).

  • Soludo, C. C (2003). Debt, poverty and inequality. In N. Okonjo-Iweala, C. C. Soludo, & M. Muhtar (Eds.), The debt trap in Nigeria (pp. 23-74). Trenton: Africa World Press.

  • Soylu, Ö. B. (2019). Do foreign direct investment and savings promote economic growth in Poland?. Economics and Business Review, 5(19), 3-22. doi:10.18559/ ebr.2019.4.1

  • Spilioti, S., & Vamvoukas, G. (2015). The impact of government debt on economic growth: An empirical investigation of the Greek market. The Journal of Economic Asymmetries, 12, 34-40. doi:10.1016/j.jeca.2014.10.001

  • Stanek, P. (2014). Public debt sustainability and the participation of the new member states in the euro area. Poznań University of Economics Review, 14(4), 22-37.

  • Stock, H. J., & Watson, W. M. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica, 61(4), 783-820. doi:10.2307/2951763

  • Swamy, V. (2020). Debt and growth: Decomposing the cause and effect relationship. International Journal of Finance & Economics, 25, 141-156. doi:10.1002/ijfe.1729

  • Tanzi, V., & Fanizza, D. (1995). Fiscal deficit and public debt in industrial countries (1970-1994). (IMF Working Paper No. 44).

  • Vamvukas, A. G. (1997). A note on budget deficits and interest rates: Evidence from a small open economy. Southern Economic Journal, 63(3), 803-811.

  • Vickrey, W. (1961). The burden of the public debt: Comment. The American Economic Review, 51(1), 132-137.

  • World Bank Report. (2014). Turkey’s Transitions. (Report No. 90509–TR). Retrieved from http://documents.worldbank.org/curated/en/507871468306558336/pdf/90509-v2-REVISED-P133570-PUBLIC-Box393190B.pdf

  • Yeldan, E. A. (2008). Turkey and the long decade with the IMF: 1998-2008. Retrieved from http://www.networkideas.org/news/jun2008/Turkey_IMF.pdf

OPEN ACCESS

Journal + Issues

Search