The Effect of Trade Openness and Terms of Trade on External Debt: An Econometric Analysis for Turkey

In this study the effects of trade openness and terms of trade in Turkey’s external debt are examined by vector autoregressive (VAR) analysis for the period 1998:Q1-2012:Q1. According to the results of variance decomposition, the source of prediction error variance of all variables is mainly from their own shocks. The share of trade openness and terms of trade in the distribution of variance of external debt realized about 9.56% and 9.34% respectively in the thirtieth period. External debt has been influenced by the almost same rate both trade openness and terms of trade which occurs with the effect of this process. The reactions of other variables to a standard-incorrect generalized contractionary effect which occurred in error terms of external debt are analyzed by action reaction function and examined that other variables react contrariwise.