Triggering economic growth to ensure financial stability: case study of Northern Cyprus

Abstract

This study questions the importance of public debt in stable growth between 1980 and 2018, specifically, the Ricardian equivalence hypothesis and Keynesian view are questioned. This study used data obtained from the Northern Cyprus State Planning Office. A restricted vector autoregressive model is used to test the causal relationships between this model and public debt, government expenditure, total capital, consumption, investment, employment, net exports, exchange rate, and gross domestic product growth rate. To ensure financial stability, the variables that trigger economic growth through increased interactions were evaluated. Accordingly, unlike other studies, the Wald test results reveal that public debt does not have a direct effect on the gross national product but indirectly affects total capital, consumption, investment, and public expenditure, all of which influence real gross domestic product (RGDP). It has been observed that employment affects RGDP, consumption, government spending, and investment. There is also bidirectional causality between consumption, government spending, and RGDP. The estimates of the Ricardian equivalent hypothesis are important. However, today's changing economic policies, declining real incomes, and consumer behavior in the face of ever-increasing inflation require that the theory be redesigned. Therefore, contrary to theoretical predictions, consumers are concerned about maintaining their standard of living rather than directing tax deductions to savings. Contrary to the claims of Keynesian researchers, no causal relationship is observed between public debt and growth in this study. However, public debt directly affects total capital, consumption, government spending, and investment, which are important for sustainable economic policy.