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.

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