The impact of inflation on economic growth – The case of Turkey

Inflation is a serious threat to the Turkish economy. Inflation, one of the main macroeconomic problems, plays a critical role in affecting the economic success of a country. The main purpose of this study is to empirically examine the effects of the inflation rate on Turkey's economic growth for the period 1990–2022 in Turkey through the ARDL bounds test. The results of the analysis show that inflation, measured by consumer prices, has a positive and significant long–term effect on economic growth. However, when the square of inflation is used as a regressor, its effect becomes negative and statistically significant as well. This confirms an inverted U–shaped relationship between economic growth and inflation. Other variables thought to impact economic growth in the study include the labour force, capital–to–GDP ratio, and the world uncertainty index. It has been concluded that the labour force and capital have a positive effect on economic growth in the long run; however, the coefficient of the labour force is statistically insignificant. Meanwhile, the world uncertainty index significantly hampers long–term economic growth. The error correction model (ECM) reveals that both inflation and the labour force have a beneficial impact on Turkish economic progress in the short run. In addition, according to the diagnostic test statistics performed in the study, the model was found to be stable without serial correlation or changing variance problems. The findings show that controlling inflation, managing capital–to–GDP ratio effectively, addressing global uncertainty, and considering the role of the labour force are crucial in policy makers' efforts to promote sustainable economic growth. These results provide policy makers with important information to design effective strategies and policies to promote economic growth in Turkey.