The effects of budget deficits on inflation rate, economic growth and interest rate: An implication for Turkey

Nowadays, Budget deficits are one of the main macroeconomic problems in developed and developing countries. The macroeconomic effects of budget deficits vary due to financing method. The basic aim of the study is to investigate the effect of budget deficits on inflation rate, economic growth, and interest rate in the period of 1980-2008 in Turkey. The cointegration relationship between inflation rate, economic growth, interest rate and money supply is detected by using Johansen method. Emprical findings show that there is long-term relationship between budget deficits and interest rate. On the other hand, the long term relationship between economic growth and money supply is not found. Since the cointegration relationship between budget deficits and interest rate is found, the error correction model is used in order to investigate direction of causality. According to emprical results, there is both short term and long term causality from budget deficits to interest rate.