Financial structure of Turkey and the impact of fiscal dominance on the financial system

The level of fiscal dominance, which is an important concept in forming public policies, is one of the main determining factors for both the holistic structure and indicators of the financial system. Fiscal dominance, which refers to the effects that fiscal policies cause in the decisions and practices of the economy, is expressed as the broadness of the space that the State provides to itself in economic dynamics. With the relationship to be established between the financial system and public policies determined under fiscal dominance, many basic dynamics of the economic structure will have to be reformed. In essence, the study aims to investigate the presence of the causality relationship between economic structures, representing different parts of the financial system, and the fiscal dominance, caused by public borrowing, and the directions and effects of this causality. The study covers data belonging to the quarter period between 2002:1 and 2020:2. First, the traditional unit root tests and the Lee-Strazicich two-break unit root test were applied to perform the stationarity test. Then, analysis of variance was performed and by taking into account the impulse-response functions, causality tests were applied. Toda-Yamamoto and Bootstrap-based Hacker-Hatemi J and Balcılar et al. Bootstrap Rolling Window causality tests were conducted. Finally, the empirical part was completed by applying the Johansen cointegration test and the Hatemi-J and Irandoust hidden cointegration test. According to the analysis results of the study; the fact that 27% of the changes in fiscal dominance are over the dollar series and that the dollar series establishes causality relationships to fiscal dominance indicates that fiscal dominance makes the economy open and fragile to currency risks. As a result of causality tests, it was determined that fiscal dominance, which established a causality relationship with all variables except the stock market variable, did not have any effect on stock market indices for the past decade. This reveals the importance of capital markets for a stable financial system. A long-term relationship was determined according to the impulse-response functions and cointegration test results, and it was concluded that the fiscal dominance emerging in the Turkish economy is not only related to the debt structure but also related mutually and holistically to the financial system. Keywords: Fiscal Dominance, Toda-Yamamoto and Bootstrap Based Hacker-Hatemi J, Bacılar et al. Bootstrap Rolling Window, Impulse-Response Functions