Abstract
Inflation is considered as a monetary phenomenon and its increase is linked with money supply according to the Monetarist view. In other words, the increase in budget deficits leads to an increase in money supply and as a result, inflation rates rise. Inflation is based on fiscal policies rather than monetary policies according to Price Level Fiscal Theory. Accordingly, increasing budget deficits leads to increases in loans, thus causes interest rates to rise and consequently inflation rises as money supply increases. In this study, the relationship between inflation, budget deficit and money supply in Turkey is analyzed using the ARDL bounds testing approach for the 1980-2017 period. According to the empirical results, there was a positive and significant relationship between inflation and budget deficit both in the long and short term.Keywords: Inflation, Deficit, Money Supply, Turkey, ARDLJel Codes: E31, E51, E52
Highlights
Emerging countries display the tendency to borrow externally to finance their growing budget deficits
Increasing budget deficits leads to increases in loans, causes interest rates to rise and inflation rises as money supply increases
Consumer Prices Index (CPI) refers to the consumer prices index, M2 refers to broadly defined monetary aggregates, deficit / GDP value (DEF) refers to the ratio of budget deficits to GDP, the Dummy model refers to the dummy variable added for correcting the structural breakage in times of economic crisis and Ut refers to the error term coefficient
Summary
Emerging countries display the tendency to borrow externally to finance their growing budget deficits. The impacts of the budget deficits in an inflationist environment will vary according to the way they are financed If governments finance their budget deficits via bond sales, budget deficits may lead to inflation via increase in monetary growth. Based on the assumption that budget deficits impact inflation in Turkish economy, the relationship between inflation, money supply and budget deficit during the period 1980-2017 are analyzed in this paper. Within this scope, theoretical approaches regarding this topic are first described and empirical studies conducted in this field are included. Section four provides information on the ARDL approach and the relationship between inflation, budget deficits and money supply in Turkey is analyzed via this method
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