Abstract:

One of the most important problems opposed to growing countries is that they do not have sufficient reserves to finance economic development. This situation is one of the crucial reasons that increase the foreign debt needs of countries. In addition, the pass-through in the exchange rate affects the macroeconomic indicators positively or negatively according to the development level of the countries. Turkey is among the countries most affected by the changes in the real exchange rate because of its fragile economic structure and the problems that need to be resolved. This research aims to measure the short- and long-term effects of real effective exchange rate volatility on government finance in Turkey. In the study, in investigating quarterly data for the term 1994Q1-2021Q2, Bai-Perron multiple structural breaks, empirical findings show five structural breaks occurred in 1998Q3, 2003Q2, 2008Q4, 2013Q2, 2017Q3 periods. The results obtained from the Johansen cointegration show that there is a long-term relationship between the variables. Granger's results reveal the existence of a bidirectional causality relationship between real exchange rates and short-term debt. The findings did not provide evidence that short-term debt causes long-term debt. Empirical results point out that policymakers should implement stabilizing policies in the exchange rate to prevent risks in the economy and to ensure and maintain stability.

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