EXTERNAL DEBT AND ECONOMIC GROWTH RELATIONSHIP USING THE SIMULTANEOUS EQUATIONS

Erdal KARAGÖL (University of York and Balıkesir University)

This study will examine the interaction among economic growth, external debt service and capital inflow using time series data for Turkey and using a multi-equation model. The results show that the relationship between debt service and economic growth should be analysed with a simultaneous equation model, because there is a two-way relationship between debt service and growth. The rise in the debt-servicing ratio adversely affects economic growth whereas the decrease in the rate of growth, reduces the ability of an economy to service its debt. When Turkey is servicing its debt, debt servicing could impair economic growth. Servicing a heavy debt may exacerbate the debt problem. In order to service its debt, Turkey had to borrow more. The higher the lagged debt stock the higher the debt service. This result is consistent with the Turkish experience which shows the existence of two way relationships between total debt stock and debt service.