Financial Stability and Economic Growth: Evidence from North Cyprus

Abstract

Given the importance of public debt for nancial stability and economic progress, this article examines the unstable economic growth rate in Northern Cyprus. The causal relationships between public debt, public expenditures, total capital, consumption, investment, employment, net exports, and GDP growth rate are questioned. This study used annual time series data between 1980 and 2018 obtained from the State PlanningOrganization. An unrestricted VAR model was used to test the causal relationship of these variables.Findings show that public debt has no direct effect on GDP. However, it indirectly affects the total capital and government expenditures as an independent variable. Except for public debt, all other variables have a value that will affect net exports. Unlike other studies, employment as an independent variable has the value of in uencing GDP, total capital, consumption, government expenditures, and net exports as dependent variables. It has been observed that consumption, investment, and government expenditure coe cients have values that will affect GDP. Insu cient control of government practices, the North Cyprus government's ine cient plans to encourage domestic production, insu cient enforcement power of domestic producers, as well as increased capital out ows, increased government debt, and budget de cit are not sustainable models.