Impact of budget deficits on economic growth: the case of Turkey in the period of 1975-2013

The effects of budget deficits on different units of the economy are one of the topics that are often discussed in the economic literature. One of the most critical discussions in theliterature is theeffect of budget deficits on economic growth. There are different thoughts among economists regarding the impact of budget deficits on economic growth. According to Keynesian economists, while budget deficits have had a positive impact on economic growth, neo-classical economists have argued that there is a relation between budget deficit and economic growth inversely. On the other hand, there is no relation between budget deficit and economic growth according to Ricardo's point of view. The aim of this study is to econometrically measure the impact of budget deficits on growth in Turkey. The data used in the analysis for the period 1975-2013 were obtained from the International Finance Statistics published by the International Monetary Fund (IMF) and the Electronic Data Distribution System published by the Central Bank of the Republic of Turkey. According to the impulse-response analysis, the 1% positive shock Gross Domestic Product responded negatively to the budget deficit. Response is meaningful statistical and economically. The response continues through outthewhole period, but after the fourthyear it becomes meaningless. Nevertheless, the size of the response is small. According to the analysis results, exchange rates and inflation also have a negative effect on economic growth. The empirical analysis result confirms the hypothesis that neoclassical economists have negative economic effects on budget deficits.