ANALYSIS OF TURKEY'S DOMESTIC DEBT STOCK INCREMENT WITH RR AND PCR

Year 2013, Volume: 1 Issue: 2, 123 - 135, 01.12.2013

İbrahim Demir Gizemaltunel Erhancene

Abstract

There are many variables that affect domestic debt. But whenvariables are taken into model together, it is usually seen that they have strongrelationship which points out to multicollinearity problem. In a multiple linearregression model, in order to decrease the standard error of related coefficientsbetween dependent and independent variables and in order to have more sensitive predictions, multicollinearity problem have to be solved. Some techniquesovercome multicollinearity problem by using data gathering and variable elimination methods. Also in some methods biased predicting methods are usedsince they correct multicollinearity problem without eliminating variables butthose methods give biased results.One of the biased methods is Ridge Regression (RR) which has been widelyused in case of multicollinearity.Another method is Principal ComponentRegression (PCR), which constitutes regression model by collecting relatedvariables in a single variable where all of the formed variables are uncorrelatedand orthogonal to each other. In this study, an application to domestic debtincrement by using RR and PCR methods has been conducted.In analysis, a multilinear regression model with 8 variables constructedbetween the years 1985-2010 intuitively thought to be affecting domestic debtincrement. However Least Square (LS) method, RR Method and PCR methodshowed that some of the variables were insignificant.Thus, after the firstanalysis, number of independent variables were limited to four and the finalanalyses were conducted with four independent variables.Analysis showed that, while RR and PCR coefficients matched with thetheoretical expectations, LS coefficients gave inconsistent results. RR resultsindicated that the public sector borrowing requirement and the internal debtservice were the only two variables that affects domestic debt increment. Onthe other hand PCR showed that beside those two variables the exchangerate and the government budget deficit were also effective on domestic debtincrement. As a result RR and PCR applied in case of multicollinearity and inboth methods significant variables met the theoretical expectations. HoweverRR results are limited since there were only two significant variables whereasPCR results gave relatively better results in which four significant variableswere found

Keywords

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