Determinants of External Debt Accumulation in Turkey: Evidence from an ARDL Bound Test Approach

Abstract

External debt is one of the most important problems for underdeveloped countries and emerging markets like Turkey. External debt and its refinancing remain the main challenges for Turkey over the last decades. The purpose of this study is to examine the impact of interest rates, savings, exchange rates and budget deficits on external debt in Turkey through the Autoregressive Distributed Lag (ARDL) bounds testing approach developed by Pesaran, Shin and Smith (2001). The ARDL test has many advantages over the other time series methods. The dependent variable is the ratio of external debt to GDP. The explanatory variables are the exchange rate, interest rate, savings rate and the budget deficit. The results reveal that those variables have significant effect on the accumulation of external debt both in the short and the long runs. To improve this outlook, many structural reforms are required to increase domestic savings and competitiveness and boost potential output.