Unveiling the Impact of Geopolitical Risks on Turkish Economy and Fiscal Dynamics

Abstract

This research aims to examine the impact of geopolitical risks on Türkiye's trade openness, household consumption, investment, government debt, and budget deficit for the quarters 2006:I–2022:IV. There are no empirical studies in the literature that examine the relationship between geopolitical risks and Turkish fiscal policy. The vector autoregressive (VAR) approach is utilized to examine the relationships among the variables. Geopolitical risks contribute to a very serious increase in inflation in Türkiye. The increase in geopolitical risks negatively affects consumption and investment and increases budget deficits and government debt. Additionally, Türkiye's trade volume has also decreased as a result of rising geopolitical risks, according to the VAR model's results. These findings demonstrate how vulnerable the Turkish economy is to geopolitical risks. Succinctly, Türkiye's public finances and economy are negatively impacted by geopolitical risks according to the analysis's findings. As a matter of fact, taking precautionary fiscal policy measures against geopolitical risks is important in eliminating the fiscal and economic losses that may arise. In this respect, this study has the potential to make a new contribution to the fiscal policy literature and to guide fiscal policy makers.