Budget Deficits, Monetary Growth and Inflation Relationship in Turkey

Abstract

According to conventional approach, inflation is purely and entirely a monetary phenomenon. The great majority of researches, however, assert that monetary policy is not sufficient for price stability by itself and need to be supported by compatible fiscal policies. Contrary to the traditional approach, fiscal theory of price levels claims that fiscal policy especially budget deficits are the determinants of inflation. This paper investigates the long-run relationships between budget deficits, monetary growth and inflation in Turkey for the period 1987-2009 by using cointegration techniques. The findings of the evidence may indicate a possible fiscal theory of price levels in Turkey in the long run.