Examination of growth hypothesis based on external debt with markov regime switching model: Turkey application

The fundamental aims of the countries are to realize their economic growth and development. However, underdeveloped or developing countries can not realize these aims due to lack of domestic savings, lack of information and technology, balance of payments deficit and foreign exchange constraints. The insufficiency of national savings to finance investments necessary for the development of countries also makes it obligatory to resort to external debt in these countries in addition to domestic debt. In the literature, the impact of external debt on growth is discussed by economists. The most important discussion of the current relationship between external debt and growth continues until today; whether the effect of external debt on growth is negative or positive. Although there are advocates of these two opinions, there are many who advocate that external debt affects growth negatively. Because, when the external debts are taken, they provides economic growth by increasing the national income and providing the resource balance, However, as the external debts are paid with principal and interest, they cause a decrease in national income. In this study, relationship between external debt and economic growth in terms of Turkey's economy was examined with Markov regime switching model. According to the obtained results of the analysis, it was concluded that the total gross external debt stock of Turkey had a negative effect on economic growth in the Markov regime change model analysis with 3 regimes and fixed variance. Nevertheless, fixed capital investments, exports and population had positive effects on economic growth. Key Words: External Debt, Economic Growth, Markov Regime Switching Model.