Examination of the Relationship among Budget Deficit, Money Supply and Inflation in Turkey: 1971-2016 Period

It is quite important to determine the factors, as well as their impacts, that cause inflation which is defined as the continuous increase in the general level of prices regarding countries. There is a serious dispute over the determinants of inflation in the literature. Traditional models assert that inflation is a monetary phenomenon and that an independent central bank would provide price stability. Nonetheless, the supporters of the price level's fiscal theory emphasize that the changes in the general level of prices are caused by the implementation of fiscal policy which is also important for ensuring price stability. In this study, the relationship among budget deficit, money supply, and inflation in Turkey is examined using the Bayer-Hanck Cointegration approach over the period 1971-2016. The analysis results indicate the existence of a long-term relationship between the variables. A 1% increase in both the money supply and the budget deficit would increase inflation by 0.82% and 0.64%, respectively.