The effect of budget deficits on inflation in Turkey: An analysis of the 1960-2020 period

The relationship between the budget deficit and inflation is one of the most important issues in macroeconomics. The issue of the budget deficit causing inflation has been a subject frequently researched by economists. In addition to printing money, governments finance deficits by borrowing domestically and abroad. Various factors such as unstable money demand, exchange rate depreciation and widespread indexation obscure the relationship between monetary financing of deficits and inflation for shorter periods. Therefore, the effect of the budget deficit, which is generally ambiguous in theory, on inflation constitutes the main purpose of the study. This study examines the effect of the budget deficit on inflation in Turkey using the data covering the period 1960-2020. Consumer Price Index (%) is used to represent inflation, and budget balance/GDP to represent budget deficits. In the study, first of all, ADF and PP unit root tests, which are traditional unit root tests, were used to ensure the stationarity of the variables. Then, Zivot-Andrews unit root test was used to allow structural breaks. After the applications with unit root tests, which take into account both traditional and structural breaks, the stationarity of the series was ensured after the first differences were taken. It has been determined that there is a long-term relationship between the variables with the cointegration test, which takes into account the structural breaks that allow up to five breaks.