| Summary: | <p align="justify">Implementation of balanced budget policy has been abandoned in the post-1980 in Turkey. With budget deficits, government’s funding need and debt burden have risen. The process of financial liberalization (1989) supported to government’s fulfillment of funding need. Government’s rising funding need led to fiscal dominance in the economy. Fiscal dominance affects exchange rate and interest rates, and then changes in the exchange rate and interest rate reflects to banking sector. The previous studies indicted that fiscal dominance affects monetary policy via exchange rate and interest rate. This is the first time that in this study the impacts of fiscal dominance are investigated in Turkey. Reel exchange rate and reel interest rate with a different method are used to be endogenous variables in this interaction. It is founded that fiscal dominance via channel of exchange rate and interest rate affects security investments, deposits, loans, and profits of the banking sector.</p>
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