Analysis with the ARDL model of the impact of defence expenditures on external debt of Turkey

Great multitude of internal and external threats to Turkey is causing the high levels of defense spending. The relationship between defense spending and macro-economic variables has been the subject of many studies. However, there is no consensus on the impact of defense spending on external borrowing. The purpose of this study is to examine the impact of defence expenditures on external debt of Turkey, within the frame of defence-debt model based on Sheikh, Chaudhry and Faridi's (2013) study, with the same variables for the time-period 1980-2018 through the Autoregressive Distributed Lag (ARDL) bounds testing approach developed by Pesaran and Shin (1999) with Pesaran, Shin and Smith (2001). The analysis was carried out with annual data of real external debt, real defence expenditures, real gross domestic product, real exports (non-defence exports) and real foreign exchange reserves for the period from 1980 to 2018. In the analysis, it was observed that 1% increase in defense expenditures increased foreign borrowing by 0.48% in the short term and 0.98% in the long term. According to the findings, defense spending has a significant positive effect on foreign borrowing both in the short run and the long run. In addition, the Toda-Yamamoto approach was used in the Vector Autoregressive (VAR)Granger cause-test, and a one-way causality relationship was determined from defense spending to external borrowing.