Empirical effects of budget balance driven inflation in Turkey

This study aims to examine the asymmetric effects of budget deficits on inflation over the period 2006:1–2023:11 in Turkey. This relationship, which is generally considered linear in the literature, was evaluated with the Asymmetric ARDL (NARDL) model in the study and different effects were analyzed in terms of direction and intensity. The effect of the budget balance represented by public expenditures and tax revenues on inflation was evaluated by taking into account the data structure through the KSS (2003) and Hepsağ (2021) nonlinear tests together with traditional unit root tests (ADF). Terasvirta (1994) linearity test results showed that the data followed the LSTAR process. Granger causality analyses revealed that there is a significant causality from public expenditures and taxes to inflation, while a long-term cointegration relationship was found between inflation and economic growth. Empirical findings show that increasing budget deficits significantly increases inflation; however, decreasing deficits does not reduce inflation at the same level. This asymmetric relationship has revealed that the financing methods of budget deficits are determinant on inflationary effects. It has been concluded that financing from the central bank increases inflationary pressures, while financing through debt affects economic growth through the interest channel. The results obtained provide important suggestions for policy makers by revealing that not only the level of deficits but also the guiding role of financing methods should be taken into account in the design of fiscal policies.