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

Yaprak Gulcan () and Mustafa Bilman
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Yaprak Gulcan: Department of Economics, Faculty of Business, Dokuz Eylül University

No 05/07, Discussion Paper Series from Dokuz Eylül University, Faculty of Business, Department of Economics

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.

Keywords: Budget deficits; exchange rates; cointegration analysis (search for similar items in EconPapers)
JEL-codes: F31 H62 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2005-12-12, Revised 2005-12-12
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-fmk, nep-ifn and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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