The relationship between price stability and financial stability: evidence from Turkey

The aim of this study is to examine the relationship between price stability and financial stability in the Turkish economy. In the study, firstly, the conceptual and theoretical framework on the subject was taken, then the relationship between price stability and financial stability was examined through econometric analysis. When the relevant literature is examined; Since the financial markets of developing countries are not sufficiently developed, there is no significant relationship between price stability and financial stability. In this study, monthly data of the Turkish economy for the period 2009-2023 were used. Consumer Price Index as an indicator of price stability and Credit Risk Premium as an indicator of financial stability were taken into account. In the econometric analysis phase, first of all, ADF, PP and KPSS unit root tests were carried out to determine the stationarity of the variables. In the second stage of the analysis, VAR model and Granger Causality Test were applied to determine the causality relationship between the mentioned variables. In the last stage of the analysis, Impact-Response Analysis and Variance Decomposition Analysis were applied. The findings provided evidence that there is a one-way causality relationship from financial stability to price stability. Deteriorations in financial stability have a negative impact on price stability. The findings show that financial stability should be taken into consideration while implementing policies to ensure price stability.