The Balance of payments, the government deficit and the role of financial development

m ABSTRACT THE GOVERNMENT DEFICIT, THE BALANCE OF PAYMENTS AND THE ROLE OF FINANCIAL DEVELOPMENT: TURKEY 1980 - 1999 B. Gülümser KAYTANCI Department of Economics Anadolu University, The Institute of Social Sciences, September 2000 Adviser Prof.Dr. İlyas SDXLAR The monetary approach to balance of payments theory suggests that domestic credit expansion in general is a government policy variable which can be used to sterilize the effects of changes in international reserves on domestic money supply. Therefore it is necessary to distinguish between the part of budget deficits financed through the domestic credit expansion and the sales of bonds. The share of credit expansion in financing of the government deficit depends on the degree of development of the financial markets in the economy. The main concern of this study is to test the above outlined hypothesis in the context of the monetary approach to balance of payments. For this purpose, first, the theoretical background of the monetary approach the balance of payments is given and a model applicable for Turkey is developed. In the next chapter, financial development concept has been outlined and various indicators of financial development widely used in the literature have been investigated. Finally, government deficits, balance of payments and the financial development records of Turkey have been shortly analyzed for the period 1980 - 1999. In order to test the hypothesis of this study, model developed in previous chapters has also been forecasted with data the taken from Turkey for the same period under investigation. According the test results conducted in the study, in general, it is possible to say that the main hypothesis of the monetary approach the balance of payments is approved for the Turkish case. It is concluded that the developments observed in the financial sector in Turkey created improvements for the financing route of the government deficit, and this, in turn, puts some positive effect for the balance of payments problem of the Turkish economy.