Analysis of the relationships between budget deficits and inflation

The effect of budget deficits on the macroeconomic variables of countries is an undeniable fact. The factors affecting the formation of budget deficits are; military reasons, growth, the effect of policies, external reasons, periodic, economic crises, natural disasters and wars, financial economic reasons, the effect of interest rates, public expenditures being more than income, the expansion of the public sector, the informal economy, losses of state-owned enterprises, cyclical financial indiscipline and inefficiency of income management, monetary reasons, political reasons, budget deficit as a political choice, increase in social expenditures, social reasons and population growth, subsidies, market financing, structural and institutional reasons. The effect of budget deficits on the general price level in economies with budget deficit problems has been the subject of many studies in recent years. In general terms, concepts such as balanced budget, economic growth, financial stability, low interest rates and exchange rates are formed by ensuring price stability. The budget deficits that have emerged as a result of the economic policies implemented by countries in recent years have revealed how treasuries finance budget deficits by printing money or borrowing from domestic and foreign countries. However, the financing method obtained by printing money has caused inflation in the economy. It is seen that domestic and foreign borrowing was chosen as the financing method of the budget deficits analyzed between 2006-2024 in Turkey. The ongoing budget deficits have created the need for more domestic and foreign borrowing and have caused budget imbalances, an increase in inflation, a decrease in welfare levels, and economic crises in the following periods. Accordingly; In order to ensure price stability, which is known as the main objective of the central bank, a consistent policy should be created by coordinating fiscal policy and monetary policy. In this context, even if budget discipline is achieved, the general level of prices may remain at high levels due to the looseness in monetary policy and uncoordinated monetary and fiscal policies. In this case, reducing the general level of prices again may be even more costly.