The Analysis of the Relationship Between Money Supply, Budget Deficit and Inflation Rate in Azerbaijan

Abstract

The most critical macroeconomic dynamics of economies include the supply of money, the budget deficit, and inflation. Moreover, inflation has a significant effect on the economy. Inflation is induced when monetary and fiscal policies are not used in a compatible and supportive manner. Because of this basis, it is interesting to examine the relationship between the money supply, the budget deficit, and inflation variables. Data was used from the Central Bank of Azerbaijan Republic annual report, World Bank, and Statista database. By applying the Granger method of causality this study aims to empirically define the relationships in the Azerbaijan economy between the supply of money, budget deficits, and inflation. The duration of 2009-2019 is being analyzed in the study and with quarterly results, the study is carried out. Budget deficits can cause inflation only if they are reflected in monetary aggregates, as inflation is a monetary phenomenon. When the central bank tries to accelerate monetary liquidity to cover or finance the budget deficit will promote inflation. The results suggest that there is one-way causality from the supply of money and the budget deficit to inflation. There is also a one-way causal link between the supply of money and the budget deficit.