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

Author

Listed:
  • 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.

Suggested Citation

  • Yaprak Gulcan & Mustafa Erhan Bilman, 2005. "The Effects of Budget Deficit Reduction on Exchange Rate: Evidence from Turkey," Discussion Paper Series 05/07, Dokuz Eylül University, Faculty of Business, Department of Economics, revised 12 Dec 2005.
    • Handle: RePEc:deu:dpaper:0507
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    File URL: http://www.deu.edu.tr/UploadedFiles/Birimler/12741/05_07.pdf
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    References listed on IDEAS

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    Cited by:

    1. K. Azim Özdemir & Mesut Saygılı, 2013. "Economic uncertainty and money demand stability in Turkey," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(3), pages 314-333, July.
    2. Tarek Bouazizi & Zouhaier Hadhek & Mongi Lassoued, 2020. "General Government Balance Shocks and Their Impact on Some Tunisian Macroeconomics Variables: Evidence from a VAR Model," International Journal of Economics and Financial Issues, Econjournals, vol. 10(6), pages 69-83.

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    More about this item

    Keywords

    Budget deficits; exchange rates; cointegration analysis;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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