The Effect of the Domestic Debt on the Financial Development: A Case Study for Turkey

The aim of the study is to investigate the relationship between domestic public debt and financial development for the Turkish economy between 2002Q1-2012Q2. The previous panel data studies for developing countries suggest two main approaches. One view asserts a positive relationship between them while the other view asserts a negative relationship. Our results which are based on time-series analysis support the second view which advocates the negative relationship between domestic indebtedness and financial development. On the other hand we criticize the generalization of the results provided by other studies. According to our view each country may have different responses against the changes in domestic public debt due to its own specific economic and financial condition.