The Effect of Fiscal Policies on Business Cycles in Turkey

Abstract

Fiscal policies are designed to balance cyclical fluctuations. Fiscal policies in developed countries are mostly countercyclical. However, fiscal policies alone cannot explain the cyclical effect of fiscal policies implemented in developing countries. This is due to weak institutional structures, political restrictions, and populist practices. The study examined the effect of fiscal policies on business cycles in Turkey between 1975–2020 using the ARDL model and annual data. According to the findings, public expenditures, investment expenditures, tax revenues, direct tax revenues, and budget balance increase the output gap. On the other hand, trade openness, government transfer payments, and indirect tax revenues reduce the output gap. Based on the empirical findings, the following comments can be made: (a) fiscal policy can be considered cyclical in this period; (b) cyclical fluctuations are reduced in open economies; (c) budget balance increases cyclical fluctuations (non-Keynesian effect). A possible reason for this is that the budget revenues mainly consist of indirect tax revenues (70% in Turkey). The significance of the results obtained in the study are as follows: (1) analyzes the impact of fiscal policies implemented by a developing economy on stability using a current and long time series; (2) provides an insight into the institutional quality and response of implemented fiscal policies through short- and long-term analysis; (3) analyzes the effect of Turkey’s ability to implement fiscal policies, which prefers the global markets integration model, and the tax technique it creates, on the economy.