The dynamic relationship between government bond spreads and fiscal indicators: Evidence from Turkey

Debt instruments have an important place in public finance. With the developments in the financial markets starting in the 1980s, certain debt instruments like the bonds and bills have received significant attention in meeting the financing needs of governments. Subsequently, the increasing volume of the issued government bonds has changed the stance of governments and investors toward the bond spreads. The bond spreads have started to be considered not only as an ordinary factor used in the government borrowing processes, but also as a significant indicator of the effectiveness of the implemented fiscal policies and as a determinant of the risk factors attached to the countries. The bond spreads tend to affect the emerging market economies (EMEs) more intensively due to their excessive need for external financial sources and the relatively poor structure of their financial sectors. After all, all these factors may cause a self-feeding loop and deem the main fiscal indicators ineffective through higher borrowing costs. In this context, the present thesis aims to analyze the dynamic relationship between government bond spreads and fiscal indicators in Turkey by additionally considering the role of some determined control variables for the period between 2006:Q1 and 2019:Q3. To analyze the dynamic relationship between the variables, Vector-Autoregressive (VAR) analyses, Engle-Granger causality tests, and Impulse Response Functions are used. According to the findings, Granger-causality tests show that there is a one-way causality from government bond spreads to fiscal indicators. In addition, Impulse-response functions demonstrate that the reaction of gross external debt to a shock in bond spreads is statistically more significant compared to the reaction of the primary budget balance. As the result of statistical analyses, gross external debt is found to be more appropriate fiscal indicator in providing resiliency to global shocks compared to the primary budget balance for Turkey.