Monetary and fiscal policies for the price stability and fiscal theory of the prive level

Among the myriad of macroeconomic policy goals a consensus has formed regarding the importance of realization of price stability. To enable attainment of this goal central banks are being insulated from all kinds of government intervention and pressure and are given goal and instrument independence. From a traditional point of view the monetary policies being applied towards this end can be considered an extension of monetary approach.Effects of monetary policy on general price levels, on the other hand, have been researched extensively in recent years. This stream of research emphasizes that application of monetary policies is not by itself adequate for price stability and need to be supported by compatible fiscal policies. Contrary to the traditional approach, fiscal theory of price levels defends that fiscal policy, especially public sector deficits are the determinants of inflation when the economic regime displays a non-Ricardian structure.The present study analyzes whether the Turkish economy has Ricardian or non-Ricardian characteristics, through an application of VAR model, using quarterly data covering the period of 1989-2007. Results support existence of a fiscal policy dominated regime, especially before 2000.