Budget deficit, exchange rate and inflation relationship in developing countries: The case of Turkey

Budget deficit, inflation, exchange rate and the relationship between these macroeconomic factors are crucial for devoloping countries targeting macroeconomic stability as in the case of Turkey. With respect to these issues, the first chapter of this study, definitions about budget deficit, theoretical approaches, causes of budget deficit and financing methods of budget deficit are discussed. In the second chapter, definitions related to inflation and exchange rate and the relationship between these macroeconomic factors and budget deficit are included. In the third chapter, the budget deficit, exchange rate and inflation data of Brazil, Mexico, Czech Republic and Poland, developing countries which implementing inflation targeting and free floating exchange rate regime in last period as Turkey, are analyzed. To conclude, last chapter of study describes historical development of Turkish Economy and comprises the econometric analysis of the causality between inflation, budget deficit and exchange rate in Turkey with 2006-2017 period data. As a result of analysis, Granger causality was found from exhange rate to budget deficit, and from inflation to budget deficit; causality wasn't found between budget deficit-exchange rate and exhange rate-inflation.