Abstract
An advanced financial system is regarded as a hallmark of development. Lending or borrowing money, or debt, plays a vital role in an economy. But just like any other economic decision, borrowing requires a thorough analysis of contingencies. Debt may lead to prosperity through sound investment, or it may overwhelm firms/people when not used properly. In today’s circumstances, borrowing from world financial markets is easier than ever before. In this paper, the possibility of foreign borrowing helping Turkey to improve its macroeconomic variables of GDP, consumption, government spending, investment, exports and current account balance is explored. We look for cointegration relationships between various foreign debt variables classified as public or private foreign debt; short-term or long-term foreign debt, and various macroeconomic variables. Later, the variables studied are tested to see if there are any statistically causal relationships between them. The following results are found: short-term foreign debt is not cointegrated with any of the macroeconomic variables when long-term foreign debt is cointegrated with some of them; private foreign debt is more effective than public foreign debt on macroeconomic variables. Whilst Turkey is critically dependent on foreign borrowing in financing its current account deficit, its current account balance is not cointegrated with any of the foreign debt data. Public foreign debt precedes government spending where private foreign debt follows private sector spending. This is interpreted as a sign that the private sector is more careful with its borrowing decisions than the government since its spending, which is procyclical with the business cycle, is leading its borrowing.
Highlights
A well-developed financial market being essential for growth is an established economic fact
The possibility of foreign borrowing helping Turkey to improve its macroeconomic variables of gross domestic product (GDP), consumption, government spending, investment, exports and current account balance is explored
We look for cointegration relationships between various foreign debt variables classified as public or private foreign debt; short-term or long-term foreign debt, and various macroeconomic variables
Summary
A well-developed financial market being essential for growth is an established economic fact. People and firms need to borrow funds for various reasons, like sustaining economic viability, maintaining a continued cash flow, expansion and many more. This does not make borrowing money an instrument without any drawbacks. The 2008 global financial crisis started with subprime borrowers defaulting on their debts. This triggered a massive sell-off of financial assets which eventually derailed the whole economy. They can elevate people to prosperity or plunge them into ruin and destruction. People are overwhelmed beneath their debt and they start selling their assets, which triggers a sell-off in the whole economy
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