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The Effects of Budget Deficit Reduction on Exchange Rate: Evidence from Turkey

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Author Info
Yaprak Gulcan () (Department of Economics, Faculty of Business, Dokuz Eylül University)
Mustafa Erhan Bilman () (Department of Economics, Faculty of Business, Dokuz Eylül University)
Abstract

This study investigates the effect of budget deficit reduction on exchange rate between US dollar and Turkish lira (TL). Our article aims to illustrate that the evidence on the relationship between budget deficits and exchange rates is not clear-cut and to explain why the theoretical approaches that underlie the relationship are ambiguous while there is general agreement that cutting budget deficits and debt will lower interest rates. The relationship between deficit reduction and exchange rates has caused a debate among the most famous monetary policy makers and researchers. [Melvin (1989), Mishkin (1992), Greenspan (1995), Thiessen (1995), Krugman (1995), Feldstein (1995)] In addition, budget deficit can be counted as one of the most common and major problem that influences the macroeconomic stability in developing economies. In this sense, cointegration method and causality tests were used in order to find out the possible effects of budget deficit reduction on exchange rates during the period of 1960-2003 in Turkey.

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File URL: http://www.deu.edu.tr/UploadedFiles/Birimler/12741/05_07.pdf
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Publisher Info
Paper provided by Dokuz Eylül University, Faculty of Business, Department of Economics in its series Discussion Paper Series with number 05/07.

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Length: 9 pages
Date of creation: 12 Dec 2005
Date of revision: 12 Dec 2005
Handle: RePEc:deu:dpaper:0507

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Related research
Keywords: Budget deficits; exchange rates; cointegration analysis;

Find related papers by JEL classification:
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
F31 - International Economics - - International Finance - - - Foreign Exchange

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  2. Laurence Ball & N. Gregory Mankiw, 1995. "What do budget deficits do?," Proceedings, Federal Reserve Bank of Kansas City, pages 95-119. [Downloadable!]
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  3. Balvers, Ronald J. & Bergstrand, Jeffrey H., 2002. "Government expenditure and equilibrium real exchange rates," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 667-692, October. [Downloadable!] (restricted)
  4. Craig S. Hakkio, 1996. "The effects of budget deficit reduction on the exchange rate," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 21-38. [Downloadable!]
  5. Menzie Chinn & Louis Johnston, 1996. "Real Exchange Rate Levels, Productivity and Demand Shocks: Evidence from a Panel of 14 Countries," NBER Working Papers 5709, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Chinn, Menzie David, 1997. "Paper pushers or paper money? Empirical assessment of fiscal and monetary models of exchange rate determination," Journal of Policy Modeling, Elsevier, vol. 19(1), pages 51-78, February. [Downloadable!] (restricted)
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  8. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
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  9. Jose De Gregorio & Holger C. Wolf, 1994. "Terms of Trade, Productivity, and the Real Exchange Rate," Working Papers 94-19, New York University, Leonard N. Stern School of Business, Department of Economics.
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  10. Engle, R.F. & Yoo, B.S., 1989. "Cointegrated Economic Time Series: A Survey With New Results," Papers 8-89-13, Pennsylvania State - Department of Economics.
  11. Andrew Levin & Chien-Fu Lin, 1992. "Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties," University of California at San Diego, Economics Working Paper Series 92-23, Department of Economics, UC San Diego. [Downloadable!]
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  12. Chinn, Menzie David, 1997. "Whither the Yen? Implications of an Intertemporal Model of the Dollar/Yen Rate," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 228-246, June. [Downloadable!] (restricted)
  13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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