Abstract
The process of deterioration in the fundamentals, in particular those related to inflation and the public sector deficits, that had started in the 1980's have accelerated in the 1990's. Meanwhile two way causative relations seem to have appeared between the fluctuations of some fundamentals. In this context, this paper examines the long term relationship between inflation and the public sector deficit and provides an analysis of the macro dynamics that derive from this relationship. Following a summary of the theoretical literature on the relationship between inflation and the public sector deficit, the behavior of these two variables in the 1975-2014 periods are delineated and an analysis of their relationship to some selected macro-variables is presented. The most important result of this article is that high and chronic inflation rates are one of the responsible of deterioration which appeared on the main economic variables particularly in the public sector balance. Similarly, in the 2000’s, on the basis of positive developments in the public balance lies in falling inflation rates quickly and permanently.
Highlights
The fact that the regional international integrations started to speed after the 1960s, that the effect of the cold war decreased and that the information age was born, caused the concept of industrialization which was under the supervision and leadership of the states to slow down
The variables used in this study for this purpose are the inflation rates (%), interest payments/budget expenditures (%), budget deficit/GDP (%), money in circulation (Million TL) and USD/TL exchange rate
The inflation is based on Wholesale Price Index (WPI) (1963=100) and is calculated by us
Summary
The fact that the regional international integrations started to speed after the 1960s, that the effect of the cold war decreased and that the information age was born, caused the concept of industrialization which was under the supervision and leadership of the states to slow down. In the period of 1970-1977, in which the import substitution was tried to be developed, the increase in oil prices (which is an important industrial input) and the rapid growth in import despite this increase, took the current account deficit (CAD) to an unsustainable level. The fact that the increase in oil prices continued until 1979, caused further increase in shortage of foreign exchange, production downturn and scarcity of goods. It laid the foundation for high and persistent inflation which will affect the Turkish economy negatively for 30 years (Tokgöz, 1998).All these negative developments have pushed the Turkish economy into a severe economic crisis which started in 1978. In order to overcome the economic crisis, 24 January decisions which were put into effect in the January of 1980 revealed that export-based growth model under the free market conditions would be followed in the long term industrialization process
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