The Analysis of Domestic Debt Asymmetry in Turkey by Regime Switching Models

AbstractDomestic debt is an important tool of government finance for the economies which are vulnerable to budget deficits arising from government expenditures exceeding revenues. This tool used for government fiscal policy is a determinant of macroeconomic stability due to the effects on growth, employment and investment variables. In this context, the analysis of domestic debt dynamics has a vital importance especially for developing economies. As a developing economy for Turkey, the deterioration of fiscal balance after 1990's has led to a consistent increase in domestic debt. Aftermath of 2001 crises, domestic debt was restrained by the fiscal discipline which came into prominence by “Transition to Strong Economic Program”. In this regard, our study examines the structure of domestic debt process in Turkish economy over the period 1998-2015. Firstly, we investigate the linearity of the domestic debt series. Following the examination of non-linearity, we analyze the transition characteristics of domestic debt series by means of STAR (Smooth Transition Autoregressive) model