Time series analysis of relationships between fiscal decentralization, economic growth and inflation in Turkey

There is a wide consensus exists between academicians and political decision makers about the view that fiscal decentralization could enhance economic growth by improving efficiency in public sector. According to this view, by diversifying the provision of public goods and services, fiscal decentralization could achieve allocative efficiency. Also technical efficiency in production of public goods and services could be achieved by competition between rival local governments. So far empirical studies didn?t find any common evidence supporting this proposition. The effect of fiscal decentralization is seem to differentiate significantly between countries and sometimes between different time periods in a given country. Consequently the studies in the last period have focused on the causes of these differences. Foremost among these causes is the fiscal decentralization?s effect on inflation. Accordingly, if inflation is the result of the delays in the implementation of stability policies, fiscal decentralization could reduce inflation by quickening decision making. But if inflation is the result of the ineffectiveness of stability policies, fiscal decentralization could raise inflation by distributing power and responsibilities. In economics literature it?s stated that higher inflation is associated with lower economic growth. Therefore it?s proposed that fiscal decentralization has an indirect effect on economic growth via inflation. The existence and structure of relationship between fiscal decentralization, economic growth and inflation is examined empirically in this study. The evidences achieved in this study shows that, fiscal decentralization?s augmenter effect on inflation curbs its positive effect on economic growth in Turkey.