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Abstract
This paper extends the Looney and Frederiksen (Citation1986) study and investigates the relationship among external debt, defence expenditures and GNP in Turkey for 1960–2002. After applying cointegration analysis of a multivariate system of equations, impulse response functions and variance decomposition are estimated. The impulse response functions indicate that defence expenditures have a positive effect on external debt stock. Moreover, impulse response of GNP to defence expenditures tended to hike slightly within two years ahead, and dipped sharply by two years, and thereafter continued at a positive level.
Notes
1“The debt overhang arises in a situation in which the debtor country benefits very little from the return to any additional investment because of debt service obligations. When foreign obligations cannot be fully met, existing resources and actual debt payments are determined by some negotiation process between the debtor country and its creditors, the amount of payments can become linked to the economic performance of the debtor country, with the consequence that at least part of the return to any increase in production would in fact be devoted to debt servicing. This creates a disincentive to investment from the point of view of the global interest of the debtor country” (Borenzstein, Citation1990, p. 316).