The effect of budget deficit on inflation: The case of Turkey between 1980 – 2019

In this study, the relationship between budget deficit and inflation has been examined theoretically and empirically. In this context, macroeconomic indicators such as Turkey's budget balance, inflation rates, interest rates, GDP and credit volume between 1980-2019 were analyzed with the help of econometric tests. In the study, the effects of public finance budget deficit, GDP, real exchange rate, loan volume and interest rate on inflation were analyzed. In order not to encounter the problem called spurious regression in the literature, unit root and stationarity analyses of six variables (inflation, budget balance, GDP, interest rate, real effective exchange rate, credit volume) were made in the first stage of the empirical study. analysis. For unit root and stationarity analysis, three-unit root tests with different theoretical foundations were applied and the results were evaluated together. It was understood that the basic hypothesis expressing the existence of a unit root for all variables with different significance levels was rejected. In this case, in order to increase the reliability of the study, the study was expanded by taking the first differences with the Phillips-Perron Unit Root Test (Level Values). ADF and PP unit root tests are traditional unit root tests that do not take into account structural breaks. Conditional Error Correction Model / Conditional Error Correction Regression (CEC), F and T bounds tests applied to the data set, Cointegration Model / Long-Run Coefficient Estimation, Error Correction Model / Short-Run Model Estimate, VAR Granger Many variables that are determinants of inflation can be interconnected in one direction or another. affects it bidirectionally. Based on the empirical results obtained, it is stated that there is a one-way causality relationship between the budget deficit and inflation. There is a need for Turkey to develop policies to reduce inflation, coordinate fiscal and monetary policies, and focus on structural reforms.