Classical and keynesian theory in the light of inflation in Turkey investigation

In this thesis, the effect of money supply and public expenditures, on inflation experienced in Turkey is examined. Quarterly data are used in the study between 2006Q1-2017Q4 period. The long-run relationship between money supply (M2, M3) and inflation and also the long-run relationship between the public expenditures and the inflation is analyzed by the cointegration test. First ADF unit root test is applied in the series in order to determine whether there is a relationship between the variables or not. The Johansen cointegration test is used to analyze the long-run relationship. After finding the relationship between the variables, the causality test based on the VECM analysis is applied. As a result of the Johansen test applied in the study, it is determined that there is a long-run relationship between inflation variable and the money supply and total public expenditure variables. According to Johansen test, variables are found to be statistically significant and positive except M2 variable. When the error correction model is considered, it is determined that 24 percent of the short term variance between the variables can be corrected for each period. In both short and long term causality relation is found in the result of causality analysis which is made to determine the short and the long term direction of the previously identified relation between the variables. In conclusion, it is determined that the money supply and the expenditures has an effect on inflation and this relation is statistically significant during the period of 2006Q1-2017Q4 in Turkey.