ArticlePDF Available

Budget Deficits and Inflation: Evidence from Turkey


Abstract and Figures

This study attempts to investigate the presence of causality between budget deficits and inflation rate. For this purpose, Granger-causality tests are employed on monthly budget deficit and inflation data of Turkey which covers two sub-periods namely,. The results indicate a positive significant causality running from budget deficits to inflation rate during the high inflation period (1987:M1-2003:M6). This causal link disappears during the low inflation period (2005:M1-2013:M6).
Content may be subject to copyright.
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
The Macrotheme Review
A multidisciplinary journal of global macro trends
Budget Deficits and Inflation: Evidence from Turkey
Serkan Erkam* and Murat Çetinkaya**
* Hacettepe University, Faculty of Economics and Administrative Sciences, Department of Public Finance, Turkey
** Member of the Competition Board, Turkish Competition Authority, Turkey
This study attempts to investigate the presence of causality between budget deficits and
inflation rate. For this purpose, Granger-causality tests are employed on monthly budget
deficit and inflation data of Turkey which covers two sub-periods namely, (1987:M1-
2003:M6) and (2005:M1-2013:M6). The results indicate a positive significant causality
running from budget deficits to inflation rate during the high inflation period (1987:M1-
2003:M6). This causal link disappears during the low inflation period (2005:M1-
Keywords: Inflation, Budget deficits, Granger-Causality tests.
1. Introduction
The relationship between the inflation rate and the budget deficit level is one of the most
examined issues in macroeconomics since these two are generally regarded as conventional
indicators of macroeconomic performance. Researchers encounter a vast theoretical and
empirical literature related to the linkage between the dynamics of the budget deficits and the
inflation rate. Hence, the causality running from budget deficits to inflation is easily found
throughout the literature.
This paper aims to evaluate the validity of this causal link by using Turkish data. For this
purpose, the next section reviews the related theoretical and empirical literature. Afterwards,
empirical framework and estimation results are summarized respectively. Finally, the last section
2. Theoretical Framework
The classical explanation of inflation essentially refers to the classical view of quantity theory of
money which suggests two basic propositions. According to the first proposition which is also
known as classical dichotomy, a permanent increase in the money stock does not change the level
of output and the velocity of money in the long run. On the other hand, the second proposition
reveals a proportional relation between the rate of inflation and the growth rate of money, which
implies that a permanent increase in money growth leads to an equal increase in the rate of
inflation in the long run.
Following classical economists, Milton Friedman the founder of monetarism presents a similar
description relying on the modern version of quantity theory and states that Inflation is always
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
and everywhere a monetary phenomenon” (Friedman 1970:24). Thus, according to the monetarist
framework, budget deficits are considered to be a source of inflation only to the extent that they
are monetized.
Later on mainstream theoretical studies started to emphasize the role of fiscal variables,
especially the budget deficits, on price level determination. This part of the literature begins with
the well-recognized work of Sargent and Wallace (1981), which highlights the importance of
fiscal and monetary policy coordination while ensuring price stability. According to Sargent and
Wallace (1981), the monetary authority's control over inflation might be much more limited than
anticipated due to the inter-temporal budget constraint of the government. In other words, the
sustainability of budget deficits may require money growth which in turn converts inflation to a
fiscally-driven monetary phenomenon.
Finally, more recent studies such as Woodford (1994, 1995, 1996) and Sims (1994, 1997) lead to
a new theory of price determination which is also known as fiscal theory of price level (FTPL).
They argue that money creation may not be the single channel through which the budget deficits
cause inflation. According to FTPL, in a non-Ricardian world where fiscal policy is the dominant
regime, the nexus between the budget deficits and inflation mainly stems from the wealth effects
of bond financed budget deficits. Thereby, monetary authority’s purpose of debt monetization is
likely to be in charge in a monetary dominant Ricardian regime which is a norm for the quantity
theory of money.
As a result, theoretical framework indicates that budget deficit-inflation causality is consistent
with FTPL while deficit-money-inflation causal sequence is checking for Sargent-Wallace
3. Overview of the Empirical Literature
Despite the enormous number of studies that focus on the causal relationship between budget
deficits and inflation, it is possible to briefly clarify them by using some salient aspects
First of all, most of these studies use time series data and employ procedures like OLS,
cointegration, causality tests, ECMs and VAR. Among these studies Hamburger and Zwick
(1981), Ahking and Miller (1985) and Darrat (1985) utilize US data and find that government
deficit, money growth and inflation are causally related only for certain sub-periods. Only,
Dwyer (1982) finds no impact between these variables for US data.
Not only Dwyer (1982) but also King and Plosser (1985), Giannaros and Kolluri (1985), Karras
(1994), Abizadeh and Yousefi (1998), Komulainen and Pirtilla (2002), Tekin-Koru and Ozmen
(2003), Grauwe and Polan (2005), Altintas et al. (2008), Rubio et al. (2009), Mukhtar and
Zakaria (2010) Mehdi and Reza (2011) and Georgantopoulus and Tsamis (2011) clearly find no
connection between the variables in question for different samples including both developed and
developing countries.
De Haan and Zelhorst (1990) collect data from 17 developing countries over the period of 1961
1985, and use VAR estimation to reveal the correlation between budget deficits and inflation.
Researchers emphasize that budget deficits inflation causality is majorly valid in high inflation
periods. Later on, this benchmark finding is supported by several studies like Fischer et al.
(2002), Loungani and Swagel (2001), Catao and Terrones (2005), Domac and Yucel (2005) and
The studies sampling just Turkey are shown in italics.
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
Lin and Chu (2013) which have definite differences both in methodology and sample selection.
Apart from these studies, Neyapti (2003) attributes this causality largely to low degrees of central
bank independence and financial market development, while Kwon et al. (2009) refers to the role
of public indebtedness.
Furthermore, Chaudhary and Ahmad (1995), Hondroyiannis and Papapetrou (1997), Metin
(1998), Vieira (2000), Alavirad (2003), Solomon & Wet (2004), Kesbic et al. (2004), Narayan et
al. (2006), Patience and Augustine (2008), Davarcioglu-Ozaktas (2008), Lozano (2009), Chimobi
& Igwe (2010) and Makochekanwa (2011) find a strong link between budget deficits and
inflation wholly due to the massive monetization which is in line with Sargent and Wallace
Hypothesis. Also, this finding is confirmed by Akcay et al. (1996), Ozgun (2000) and Dogru and
Senturk (2013) only in the long run.
Finally, Choudhary and Parai (1991), Hondroyiannis and Papapetrou (1994), Shabbir and Ahmed
(1994), Metin (1995), Insel (1995), Lim and Papi (1997), Cotarelli et al. (1998), Favero and
Spinelli (1999), Onwioduokit (1999), Darrat (2000), Fratianni and Spinelli (2001), Piontkivsky et
al. (2001), Telatar (2002), Gunaydin (2004), Barisik and Kesikoglu (2006), Cetintas (2005),
Agha and Khan (2006), Wolde-Rufael (2008), Oktayer (2010), Habibullah et al. (2011), Nawaz
et al. (2012), Dogru (2014) and Jalil et al. (2014) find that an increase in budget deficit would
lead to a rise in inflation rate directly as FTPL asserts.
4. Econometric Framework, Data and Results
The causal link between the budget deficit and inflation in Turkish economy is investigated for
the sub-periods (1987M1-2004M12) and (2005M1-2013M6) within the frame of Granger-
causality methodology
. The inflation rate series (inf) used in this study are computed from the
monthly CPI indices (1987=100) obtained from the CBRT (Central Bank of the Republic of
Turkey) Electronic Data Distribution System. As a proxy for the budget deficit, we use the ratio
of budget revenues to the budget expenditures (bb) which are obtained from the monthly public
account bulletin of the Ministry of Finance General Directorate of Accounting. Both of the series
are seasonally adjusted by applying Census X12 procedure.
Table 1. Descriptive Statistics of Variables
(1987:M01 - 2004:M12)
(1987:M01 - 2004:M12)
(2005:M01 - 2013:M06)
Std. Dev.
# of Obs.
The selection of sub-periods majorly influenced by three factors. First of all, the context of consumer price index
has changed by the end of 2004. Secondly, Turkish government started to secure primary budget surpluses by the
year 2005. Lastly, the first sub-period reflects high and chronic inflation episode while the second one represents
vice versa. Last two factors could be verified by the descriptive statistics shown in Table 1.
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
Prior to causality analysis a couple of stationarity tests (ADF and PP) are carried out in order to
eliminate the need of long run relationship. Also, the possibility of utilizing dummy variables for
the structural break points in VAR models requires to perform Zivot Andrews stationarity test.
The results of the stationarity analysis with regard to the Augmented Dickey Fuller and Philips-
Perron unit root tests are reported in Table 2. As shown in Table 2, both series are found to be
stationary at 1% significance level in either sub-periods with one exception
Table 2. Unit root test results
bb (1987:M01 - 2004:M12)
-3.936700a (0)
bb (2005:M01 - 2013:M06)
-3.209455b (2)
inf (1987:M01 - 2004:M12)
-8.079847a (0)
inf (2005:M01 - 2013:M06)
-9.117654a (0)
Critical value 1% : -3.46
Critical value 5% : -2.87
Critical value 10% : -2.57
Notes: (i) The parentheses indicate the appropriate lag lengths for the ADF regressions and the
appropriate bandwidths for the PP regressions. The lags are determined by Schwarz information
criteria (SIC) (ii) a, b and c denote 1, 5 and 10 % levels of statistical significance, respectively.
Since the period of analysis covers 1994, 2001 and 2008 crisis together with the stability
programs, the stationarity analysis should be performed by using an appropriate methodology that
takes into consideration the possible structural breaks. Accordingly, beside ADF and PP unit root
tests, Zivot Andrews (1992) method is applied to test the null of unit root against the alternative
hypothesis asserting the stationarity of the series with an endogenously determined one-time
break. Within three models of ZA methodology, Model A and Model B allow for a change in
intercept and trend respectively, while Model C permits a shift both in intercept and trend. The
models have the following forms,
(Model A)       
   (1)
(Model B)       
   (2)
(Model C)
       
   (3)
where the DUt(λ) is a dummy variable that defines a mean shift in intercept at time TB, while
DTt(λ)is the corresponding trend shift dummy variable. DUt(λ) = 1 if t˃TB and zero otherwise.
On the other hand, DTt(λ) = T-TB if t˃TB and zero otherwise. The null of unit root is rejected if
α is statistically significant. The results of the ZA unit root test is presented in Table 3.
The budget deficit series are stationary at 5% significance level for the second sub-period (2005M1-2013M6).
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
Table 3. Zivot Andrews Test Results
(1987:M01 - 2004:M12)
Model A
Model B
Model C
(2005:M01 - 2013M6)
Model A
Model B
Model C
Critical value %1 : -5.43
Critical value %1 : -4.93
Critical value %1 : -5.57
Notes: (i) a, b and c denote 1, 5 and 10 % levels of statistical significance, respectively.
Table 3 indicates that either budget balance and inflation rate series are stationary at 1%
significance level with regard to Model A, B and C in both sub-periods. Furthermore, it could be
seen that the structural breaks for the series coincide to the crisis periods as expected pre-
The final step of the estimation methodology used in this study is to investigate the relationship
between the budget deficits and inflation through a Granger non-causality analysis as both of
these variables are stationary at level. Accordingly, inflation and budget deficit series are
subsequently exploited within the p-th order vector autoregressive [VAR (p)] framework for the
Granger non-causality analysis which is proposed by Granger (1969).
 
 
    (4)
  
 
 
   (5)
In the single equations of the above [VAR (p)] model which are estimated by ordinary least
squares separately, Granger non-causality hypotheses are tested at lags 1 to 12. Granger non-
causality tests are based on the null hypotheses of H0: β1=β2=…..=βi=0 in equation (4) and H0:
δ1= δ 2=…..= δ i=0 in equation (5). The rejection of the null hypothesis in equation (4) means that
budget deficits does not Granger-cause inflation, which is accepted as an evidence for the causal
link running from budget deficits to inflation.
Optimal lag length (p) for the VAR model and Granger-causality analysis is determined by
means of Akaike Information Criteria (AIC), Schwarz Criteria (SC), Hannan-Quinn Criteria
(HQ) and LM serial correlation tests which are presented in Table 4 and 5.
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
Table 4. Optimal Lag Length Determination (1987:M01 - 2004:M12)
Notes: i) Bold figures in AIC, SC and HQ columns stand for the optimal length. ii) Bold figures
in LM columns stands for no serial correlation.
Table 5. Optimal Lag Length Determination (2005:M01 - 2013:M06)
Notes: i) Bold figures in AIC, SC and HQ columns stand for the optimal length. ii) Bold figures
in LM columns stands for no serial correlation.
In addition to the selection criteria, LM test has to indicate no serial correlation at the determined
lag length. Accordingly, for the first sub-period (1987M1-2004M12) optimal lag lengths are 1
and 5. On the other hand, for the second period (2005M1-2013M6) there is only one optimal lag
length which is equal to 1, as the lag length indicated by AIC fails from serial correlation test.
Estimates of the [VAR (p)] inflation models for two sub-periods are presented in Table 6. The
estimates for the first sub-period (1987M1-2004M12) are quite better. Impulse dummies for crisis
periods (1994 and 2001) are significant at 1% significance level. Also models are overall
significant with relatively high F test values (86.25941 and 34.14294) and adjusted R2 (0.614441
and 0.654443). The estimates for the second sub-period are quite weak, as the inertia in the
inflation dynamics of Turkey is eliminated because of the significant increase in credibility and
decline in inflationary expectations. Nevertheless, the VAR model we used for this period is
overall significant at 1% level as the F test value is equal to (6.937408).
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
Table 6. Estimates of [VAR (p)] Inflation Models
(1987:M01 - 2004:M12)
(2005:M01 - 2013:M06)
Model 1 (lag = 1)
Model 1 (lag = 5)
Model 1 (lag = 1)
Dependent Variable
inf (-1)
inf (-2)
inf (-3)
inf (-4)
inf (-5)
bb (-1)
bb (-2)
bb (-3)
bb (-4)
bb (-5)
Adj. R2
Notes: i) a, b and c denote 1, 5 and 10 % levels of statistical significance, respectively. ii) D94,
D01 and D11 dummies stand for eliminating outlier effects stem from crisis periods.
Finally results for Granger-causality tests are presented in Table 7. Although the Granger-
causality analysis is performed for 1 to 12 lags, Table 7 just reports the results at the lags which
are chosen by appropriate selection criteria.
Table 7. Granger Causality Test Results
H0: Budget Deficits Does Not Granger-Cause Inflation (1987:M01 - 2004:M12)
Lag 1
Lag 5
H0: Budget Deficits Does Not Granger-Cause Inflation (2005:M01 - 2013:M06)
Lag 1
Notes: i) a, b and c denote 1, 5 and 10 % levels of statistical significance, respectively. ii) The
above statistics are obtained from the Granger causality block exogeneity Wald tests. iv) Two
different lags are provided for the first period since AIC, SC, HQ and LM values do not indicate
one lag.
The results indicate a significant causality running from budget deficits to inflation rate during
the high inflation period (1987:M1-2003:M6). This causal link disappears during the low
inflation period (2005:M1-2013:M6). This finding is in line with several studies like De Haan
and Zelhorst (1990), Fischer et al. (2002), Loungani and Swagel (2001), Catao and Terrones
(2005), Domac and Yucel (2005) and Lin and Chu (2013). Correspondingly, the decline in
budget deficits during the second sub-period underpin reaching and sustaining a disinflationary
economic environment. This fact affirms the fiscal policy implications proposed by former
studies like Metin (1995) and Günaydın (2004).
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
5. Conclusion
This study re-examines a well-known causal relationship between budget deficits and inflation
for Turkey in two different sub-periods. Following the justification of sub-period choice the
causal link in question was tested by using VAR methodology and Granger non-causality
procedures. Non-causality tests confirmed the causality running from budget deficits to inflation
for the first sub-period in which the average inflation is relatively high. This finding disappeared
when the second sub-period with low average inflation is analyzed. These results could be
attributed to the strong fiscal stabilization policies pursued in the Turkish economy aftermath of
2001 crisis.
Abizadeh, S. and Yousefi, M. 1998. Deficits an Inflation: An Open Economy Model of the United States.
Applied Economics, Vol. 30, No. 10, pp. 1307-1316.
Agha, A.I. and Khan, M.S. 2006. An Empirical Analysis of Fiscal Imbalances and Inflation in Pakistan.
SBP Research Bulletin, Vol. 2, No.2, pp. 342366.
Akcay, O.C. Alper, C.E. and Ozmucur, S. 1996. Budget Deficit, Money Supply and Inflation: Evidence
from Low and High Frequency Data from Turkey, Bogazici University Research Papers, No. 12.
Alavirad, A. 2003. The Effect of Inflation on Goverment Revenue and Expenditure: The Case of The
Islamic Republic of Iran. Organization of the Petroleum Exporting Countries, Vol. 27 No.4, pp. 331-341.
Altintas, H., Cetintas, H. and Taban, S. 2008. Turkiyede Butce Acigi, Parasal Buyume ve Enflasyon
Arasındaki Iliskinin Ekonometrik Analizi: 19922006. Anadolu Universitesi Sosyal Bilimler Dergisi, Vol.
8 No.2, pp. 185-208. (in Turkish)
Ahking, F.W. and Miller, S.M. 1985. The Relationship Between Government Deficits, Money Growth and
Inflation. Journal of Macroeconomics, Vol. 7, No. 4, pp. 447467.
Barisik, S. and Kesikoglu, F. 2006. Turkiye’de Butce Aciklarinin Temel Makroekonomik Degiskenler
Uzerine Etkisi (1987-2003 VAR, Etki-Tepki Analizi, Varyans Ayristir-masi), Ankara Universitesi SBF
Dergisi, Vol. 61, No. 4, pp. 60-82. (in Turkish)
Catao, L.A.V. and Terrones, M.E. 2005. Fiscal Deficits and Inflation, Journal of Monetary Economics,
Vol. 52, No. 3, pp. 529554.
Cetintas, H. 2005. Turkiye’de Butce Aciklari Enflasyonun Nedeni Midir?, Iktisat Isletme ve Finans, Vol.
20, No. 229, 115-31. (in Turkish)
Chaudhary, M. A. and Ahmad, N. 1995. Money Supply, Deficits and Inflation in Pakistan. The Pakistan
Development Review, No.34, Vol. 3, pp. 945-956.
Choudhary, M. A. S. and Parai, A. K. 1991. Budget Deficit and Inflation: The Peruvian Experience.
Applied Economics. Vol. 23, No., pp. 1117-1121.
Chimobi, O. P. and Igwe, O. L. 2010. Budget Deficit, Money Supply and Inflation in Nigeria. European
Journal of Economics, Finance and Administrative Sciences, Vol.19, pp. 1450-2887.
Cottarelli, C., Griffiths, M.E.L. and Moghadam, R. 1998. The Nonmonetary Determinants of Inflation: A
Panel Data Study. IMF Working Paper, No. 98/23.
Darrat, A.F. 1985. Inflation and Federal Budget Deficits: Some Empirical Results, Public Finance Review,
Vol.13, No.2, pp. 206215.
Darrat, A. F. 2000. Are Budget Deficits Inflationary? A Reconsideration of the Evidence. Applied
Economics Letters, Vol. 7, No. 10, pp. 633-636.
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
Davarcioglu-Ozaktas, F. 2008. Fiyat Duzeyinin Belirlenmesinde Yeni Yaklasimlar ve Turkiye Deneyimi.
Akademik Incelemeler, Vol. 3, No. 1, pp. 157-174. (in Turkish)
De Haan, J. and Zelhorst, D. 1990. The Impact Of Government Deficits On Money Growth In Developing
Countries, Journal of International Money and Finance, Vol. 9, No. 4, pp. 455469.
Dwyer, G.P. 1982. Inflation and Government Deficits, Economic Inquiry, Vol. 20, No. 3, pp. 315329.
Dogru, B. and Senturk, S. H. 2013. Latin Amerika Ulkelerinde Butce Acigi ve Enflasyon Arasindaki
Esbutunlesme Iliskisinin Analizi, Erciyes Universitesi Iktisadi ve Idari Bilimler Fakultesi Dergisi, No. 41,
pp. 89109. (in Turkish)
Dogru, B. 2014. Yuksek Enflasyon Donemlerinde Butce Acigi ve Enflasyon Arasinda Nedensellik Iliskisi
Var Midir? 1978-2002 Donemi Turkiye Ornegi, Eskisehir Osmangazi Universitesi Iktisadi ve Idari
Bilimler Fakultesi Dergisi, Vol. 9, No. 1, pp. 113129. (in Turkish)
Domac, I. and Yucel, E. M. 2005. What Triggers Inflation in Emerging Market Economies?, Review of
World Economics, Vol.141, No. 1, pp. 141164.
Favero, C. A. and Spinelli, F. 1999. Deficits, Money Growth and Inflation in Italy: 1875-1994. Economic
Notes: Review of Banking Finance and Monetary Economics, Vol. 28, No. 1, pp. 43-71.
Fischer, S., Sahay, R. and Végh, C.A. 2002. Modern Hyper- and High Inflations, Journal of Economic
Literature, Vol. 40, No. 3, pp. 837880.
Fratianni, M. and Spinelli, F. 2001. Fiscal Dominance and Money Growth in Italy: The Long
Record. Explorations in Economic History, Vol. 38, pp. 252272.
Friedman, M. 1970. The Counter-Revolution in Monetary Theory, London: Institute of Economic Affairs.
Georgantopoulus, A. G. and Tsamis, A. D. 2011. The Macroeoconomic Effects of Budget Deficits in
Greece: A VAR-VECM Approach. International Research Journal of Finance and Economics. Vol.79 pp.
Giannaros, D.S. and Kolluri, B.R. 1985. Deficit Spending, Money, and Inflation: Some International
Empirical Evidence, Journal of Macroeconomics, Vol.7, No.3, pp. 401417.
Granger, C.W.J. 1969. Investigating Causal Relations by Econometric Models and Cross-Spectral
Methods, Econometrica, Vol.37, No.3, pp. 428438.
Grauwe, P.D. and Polan, M. 2005. Is Inflation Always and Everywhere a Monetary Phenomenon?
Scandinavian Journal of Economics, Vol. 107, No.2, pp. 239259.
Gunaydın, I. 2004. Butce Aciklari Enflasyonist Midir? Turkiye Uzerine Bir Inceleme, Dokuz Eylul
Universitesi Sosyal Bilimler Enstitusu Dergisi, Vol. 6, No.1, pp. 158-181. (in Turkish)
Habibullah, M. S., Cheah, C. and Baharom, A. H. 2011. Budget Deficits and Inflation in Thirteen Asian
Developing Countries. International Journal of Business and Social Science. Vol. 2, No. 9, pp. 192-204.
Hamburger, M.J. and Zwick, B. 1981. Deficits, Money and Inflation. Journal of Monetary Economics,
Vol. 7, No.1, pp. 141150.
Hondroyiannis, G. and Papapetrou, E. 1994. Cointegration, Causality and the Government Budget-
Inflation Relationship in Greece. Applied Economic Letters. Vol. 1, No. 11, pp. 204-206.
Hondroyiannis, G. and Papapetrou, E. 1997. Are Budget Deficits Inflationary? A Cointegration Approach.
Applied Economic Letters. Vol. 4, No. 8, pp. 493-496.
Insel, A. 1995. The Relationship Between the Inflation Rate and Money Financed Deficit in Turkey:
1977-1993. The University of New South Wales School of Economics Discussion Paper, No.31.
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
Jalil, A., Tariq, R. and Bibi, N. 2014. Fiscal Deficit and Inflation: New Evidences from Pakistan Using A
Bounds Testing Approach, Economic Modelling, Vol. 37, pp. 120126.
Karras, G. 1994. Macroeconomic Effects of Budget Deficits: Further International Evidence, Journal of
International Money and Finance, Vol. 13, No. 2, pp. 190210.
Kesbic, C.Y. Baldemir, E. and Bakimli, E. 2004. Butce Aciklari ile Parasal Buyume ve Enflasyon
Arasındaki Iliski: Turkiye Icin Bir Model Denemesi, Celal Bayar Universitesi Iktisadi Idari Bilimler
Fakultesi Dergisi: Yonetim ve Ekonomi, Vol. 11, No. 2, pp. 27-40. (in Turkish)
King, R.G. and Plosser, C.I. 1985. Money, Deficits, and Inflation. Carnegie-Rochester Conference Series
on Public Policy, Vol. 22, No. 1, pp. 147196.
Komulainen, T. and Pirttila, J. 2002. Fiscal Explanations For Inflation: Any Evidence From Transition
Economies?, Economics of Planning, Vol. 35, No. 3, pp. 293316.
Kwon, G., McFarlane, L. and Robinson,W. 2009. Public Debt, Money Supply, and Inflation: A Cross-
Country Study, IMF Staff Papers, Vol. 56, No. 3, pp. 476515.
Lim, C. H. and Papi, L. 1997. An Econometric Analysis of Determinants of Inflation inTurkey. IMF
Working Paper, No. 97/170.
Lin H.-Y. and Chu H.-P. 2013. Are Fiscal Deficits Inflationary? Journal of International Money and
Finance, Vol. 32, pp. 214-233.
Loungani, P. and Swagel P. 2001. Sources of Inflation in Developing Countries, IMF Working Paper, No.
Lozano, I. 2009. Budget Deficit, Money Growth and Inflation: Evidence from Colombian Case. Money
Affairs, Vol. 22, No. 1, pp. 65-95.
Makochekanwa, A., 2011. Impact of Budget Deficit on Inflation in Zimbabwe. Economic Research
Guardian, Vol. 1, No. 2, pp. 4959.
Mehdi, S. and Reza, M. 2011. Relationship Between Goverment Budget Deficits and Inflation in the
Iran’s Economy. Information Management and Business Review, Vol.2 No.5, pp. 223-228.
Metin, K. 1995. An Integrated Analysis of Turkish Inflation, Oxford Bulletin of Economics and Statistics,
Vol. 57, No. 4, pp. 513-533.
Metin, K. 1998. The Relationship Between Inflation and the Budget Deficit in Turkey, Journal of
Business and Economic Statistics, Vol. 16, No. 4, pp. 412422.
Mukhtar, T. and Zakaria, M. 2010. Budget Deficit, Money Supply and Inflation: The Case of Pakistan.
Research Paper, Privredna Kretanja i Ekonomska Politika, No. 122/2010.
Narayan, P. K., Narayan, S. and Prasad, A. D. 2006. Modeling the Relationship Between Budget Deficits,
Money Supply and Inflation in Fiji. Pacific Economic Bulletin, Vol. 21, No. 2, pp. 103-116.
Nawaz, M., Iqbal, M.M., Ali, A. and Zaman, K. 2012. Fiscal theory of price Level: A Panel Data Analysis
for Selected SAARC Countries. Romanian Journal of Economic Forecast, Vol. 3, pp. 152170.
Neyapti, B. 2003. Budget Deficits and Inflation: The Roles of Central Bank Independence and Financial
Market Development. Contemporary Economic Policy, Vol. 21, No.4, pp. 458-475.
Oktayer, A. 2010. Turkiye’de Butce Acigi, Para Arzi ve Enflasyon Iliskisi, Maliye Dergisi, No. 158, pp.
431-447. (in Turkish)
Onwioduokit, E. A. 1999. Fiscal Deficits and Inflation Dynamics in Nigeria: An Empirical Investigation
of Casual Relationships. CBN Economic and Financial Review, Vol. 37, No. 2, pp. 1-16.
Serkan Erkam and Murat Çetinkaya, The Macrotheme Review 3(8), Fall 2014
Ozgun, D. B. 2000. An Empirical Approach to Fiscal Deficit and Inflation: Evidence from Turkey, The
Undersecretariat of Treasury General Directorate of Economic Research Working Papers, January, pp. 1-
Patience, A.I. and Augustine O.O. 2008. Debt Financing and its Inflationary Impact on Developing
Economies: Nigeria Economy in Perspective, Journal of Financial Management and Analysis, Vol. 21,
No.1 pp. 58-68.
Piontkivsky, R., Bakun, A., Kryshko, M. and Sytnyk, T. 2001. The Impact of the Budget Deficit on
Inflation in Ukraine. International Centre for Policy Studies Research Report.
Rubio, O.B., Diaz-Roldan, C. and Esteve, V. 2009. Deficit Sustainability and Inflation in EMU: An
Analysis from the Fiscal Theory of the Price Level. European Journal of Political Economy, Vol. 25, Vol.
4, pp. 525539.
Sargent T.J. and N. Wallace 1981. Some Unpleasant Monetarist Arithmetic, Federal Reserve Bank of
Minneapolis Quarterly Review, Fall.
Shabbir, T. and Ahmed, A. 1994. Are Government Budget Deficits Inflationary? Evidence from Pakistan.
Pakistan Development Review, Vol. 33, No.2, pp. 955967.
Sims C.A. 1994. A Simple Model for the Study of the Determination of the Price Level and the Interaction
of Monetary and Fiscal Policy, Economic Theory, Vol. 4, No.63, pp. 381-399.
Sims C.A. 1997. Fiscal Foundations of Price Stability in Open Economies, unpublished manuscript, Yale
University, September.
Solomon, M. and Wet, A. 2004. The Effect of a Budget Deficit on Inflation: The Case of Tanzania. South
African Journal of Economic and Management Sciences, Vol.7, No. 1, pp. 100-116.
Telatar, E. 2002. Para ve Maliye Politikasi Dominant Rejimlerde Fiyat Belirlenemezlik Problemi ve
Merkez Bankasi Bagimsizligi, Ekonomik Yaklasim Dergisi, Vol.10, No. 35, pp. 520. (in Turkish)
Tekin-Koru, A. and Ozmen, E. 2003. Budget Deficits, Money Growth and Inflation: The Turkish
Evidence. Applied Economics, Vol. 35, No. 5, pp. 591-596.
Vieira, C. 2000. Are Fiscal Deficits Inflationary? Evidence for the EU. Loughborough University
Economic Research Paper, No. 7, pp. 1-16.
Wolde - Rufael, Y. 2008. Budget Deficits, Money and Inflation: The Case of Ethiopia. The Journal of
Developing Areas, Vol. 42, No. 1, pp. 183-199.
Woodford, M. 1994. Monetary Policy and Price-Level Determinacy in a Cash-in-Advance Economy,
Economic Theory, Vol. 4, No. 3, pp. 345-380.
Woodford, M. 1995. Price-Level Determinacy without Control of a Monetary Aggregate, Carnegie-
Rochester Conference Series on Public Policy, Vol. 43, pp. 1-46.
Woodford, M. 1996. Control of Public Debt: A Requirement for Price Stability?, NBER Working Paper,
No. 5684, July.
... deficit so as to lessen its effect on the current account and lending interest rates. Such actions should focus at increasing Uganda's tax revenue base by employing efficient and effective tax collection mechanisms. Government should therefore redouble efforts expended in fighting tax evasion and corruption that weaken its tax collection programme.Erkam and Cetinkaya (2014) examined the causality between budget deficits and inflation rate for Turkey in two different sub-periods, viz: (1987:M 1 -2003:M 6 ) and (2005:M 1 :2013:M 6 ). Following the justification of sub-period choice the causal link in question was tested by employing VAR methodology and Granger non-causality techniques. Non-causality tests co ...
Full-text available
This study assessed the impact of deficit financing on selected macroeconomic variables in Nigeria for the period 1986-2018. Specifically, this study sought to: (i) examine the influence of deficit financing [(measured by external source of deficit financing (EXSDF) and non-bank source of deficit financing (NBSDF)] on real gross domestic product, (ii) ascertain the effect of EXSDF and NBSDF on gross domestic product per capita, and (iii) investigate the impact of EXSDF and NBSDF on foreign exchange rate, and (iv) assess the effect of EXSDF and NBSDF on interest rate. This study adopted ex-post facto design. Preliminary tests were carried out using Augmented Dickey-Fuller to ascertain stationarity of the data so as to forestall obtaining spurious regression results, as well as normality test (descriptive statistics) to determine how well distributed the variables were. Ordinary Least Squares (OLS) method was used to estimate the variables. Empirical decisions were based on a 5% level of significance. This study discovered as follows that: (a) EXSDF had a negative and significant impact on real GDP, but NBSDF had a positive and significant impact on real GDP as explained by the negative coefficient value (-0.25) of the explanatory variable (EXSDF). (b) EXSDF exerted a negative and significant influence on GDP per capita), but NBSDF exerted a positive and significant influence on GDPC; (c) EXSDF had a positive and significant effect on foreign exchange rate (EXR). Also, NBSDF had a positive and significant effect on EXR, and (d) EXSDF had a negative and significant impact on interest rate (INTR), but NBSDF had a positive and significant impact on INTR. The implication of the findings was that neither deficit financing improved macroeconomic performance of Nigeria's economy nor stabilized it and therefore could not be used to forecast improvement or slowdown in economic growth in Nigeria within the sampled period. This situation could be attributed to ineffective fiscal policy implementations and lack of budget discipline. In conclusion deficit financing remained a veritable means of enhancing revenue profile of the federal/State governments and macroeconomic performance of Nigeria's economy. Based on the findings, this study recommended that deficit financing in Nigeria should be focused on the productive sectors of the economy. In addition, government must adopt fiscal adjustment mechanism that enhances income generation through improved taxes rather than borrowing to finance deficits, among others.
... Doğru (2014) determined that the budget deficit and inflation rate are cointegrated in the long run, and the budget deficit inflation is the Granger cause of the short run. Erkam and Çetinkaya (2014), a causality relationship from budget deficit to inflation was determined between January 1987 and December 2004. This causality relationship was not found in the low inflation period between January 2005 and December 2013. ...
Full-text available
Bütçe açığı, enflasyon ve döviz kuru arasındaki ilişki makroekonomik istikrar hedefleyen Türkiye açısından oldukça önemlidir. Bu noktadan hareketle, bu üç makroekonomik değişken arasındaki ilişkinin incelenmesi çalışmanın ana konusunu oluşturmaktadır. Bu amaçla çalışmada, Ocak 2006 - Aralık 2017 tarihleri arasındaki 144 adet aylık gözlemden oluşan bütçe açığı, enflasyon ve reel döviz kuru verileri kullanarak ekonometrik analiz gerçekleştirilmektedir. Ekonometrik analiz uygulanırken öncelikle değişkenlerin birim kök testlerinin analizi yapılmakta ve ardından Granger nedensellik testi analizi uygulanmaktadır. Değişkenler arasındaki dinamik ilişkileri ortaya çıkarmak amacıyla, etki tepki fonksiyonları ve varyans ayrıştırma yöntemleri kullanılmaktadır. Çalışmada kullanılan analizlerin sonucuna göre, reel döviz kurundan bütçe açığına ve enflasyondan bütçe açığına doğru çift taraflı Granger nedensellik ilişkisi tespit edilirken döviz kuru ile enflasyon arasında nedensellik tespit edilememiştir. Aralarında Granger nedenselliği bulunan bütçe açığı ile enflasyon ve bütçe açığı ile reel döviz arasında, değişkenlerde meydana gelebilecek şokların kendileri ile birbirleri üzerindeki etkilerini ortaya koyan bulgular elde edilmiştir. Çalışmanın kapsadığı dönem olan 2006-2017 tarihleri arasında, hem küresel finansal piyasalardaki genişleme ile birlikte gelişmekte olan ülkelere sermaye girişinin artması ve USDTRY kur oynaklığının azalması, hem de ülkemizde uygulanan enflasyon hedeflemesi para politikasının istikrarlı bir şekilde uygulanması özellikle tüketici enflasyon oranları ile reel döviz kuru arasındaki nedensellik ilişkisinin tespit edilememesinin nedenleri olarak gösterilebilir.
... Although the conventional economic wisdom is not explicit on the period in which the causality occurs among fiscal deficit, interest rate and inflation, however the issues surrounding the direction and the period of causality among fiscal deficit, interest rate and inflation are of great importance for effective policy formulation. Validating the theoretical view with datasets to produce empirical evidence which are great importance for policy developments, numerous studies (see Şahin, 2019;Nwakobi, Echekoba & Ananwude, 2018;Nwakoby, Okaro & Ananwude, 2016;Tiwari, Bolat & Koçbulut, 2015;Erkam & Çetinkaya, 2014;Jalil, Tariq & Bibi, 2014;Koyuncu, 2014;Odionye & Uma 2013, among others) have investigated the direction of causality, pairing either fiscal deficit and interest rate, fiscal deficit and inflation or interest rate and inflation though without combining the three variables and even with varied outcomes. While most, if not many, of these studies concentrate on investigating the direction of causality between the variables, the period in which the causality occurs has not attracted research interest especially in developing countries like Nigeria. ...
... Quant au biais inflationniste des déficits, la littérature est formellement divisée. Certains pensent que les pressions budgétaires alimentent notablement les poussées d'inflation en monétisant les importants déficits et l'inflation élevée est presque toujours un phénomène budgétaire voir (Bruno & Fischer, 1990;Erkam, 2014;Neyapti, 2003). Cette causalité est vérifiée dans les travaux de (Habibullah et al, 2011) qui ont déterminé un rapport soutenu dans treize pays asiatiques. ...
Full-text available
The financing of Algerian budget deficits, between 2000 and 2019, was made by appealing to the monetary authority, through devaluations, refinancing of banks and unconventional financing since Law n° 17-10. Not to mention the FRR and NLEG. This study explains these financings and tries to detect their inflationary consequences. The evolution of the balance sheet size of the Bank of Algeria, the money base and the money supply, as well as the CPI, suggests inflationary effects of devaluations, combined with direct or triangular monetization of deficits.
... The relationship between budget deficits and inflation has attracted increasing academic interest across the globe and the results of their research outputs have continued to be mixed and inconclusive (Afonso & Jalles, 2019;Chukwu, 2013;Kaur, 2019;Lin & Chu, 2013). While some studies have established that it is the fiscal deficit that precedes and explains inflation ( Catão & Terrone, 2005;Erkam & Çetinkaya, 2014;Lin & Chu, 2013;Maio Bulawayo & Seshamani, 2018;Oladipo & Akinbobola, 2011;Olubiyi & Bolarinwa, 2018;Onwioduokit, 1999;Ozurumba, 2012;Ssebulime & Edward, 2019), some other studies indicate the causal link running from inflation to fiscal deficit (Ishaq & Mohsin, 2015;Ndanshau, 2012;Ogunmuyiwa, 2008). Also, some empirical studies have established a two-way causality between the two variables (Chimobi & Igwe;Onwiduokit, 1999;Oseni & Sanni, 2016). ...
This paper investigates the symmetric and asymmetric relationship between fiscal deficits and inflation in Nigeria within the context of bootstrap simulations with leverage adjustments using the quarterly frequency data from 1981Q1 to 2016Q4. The findings reveal that there is neither symmetric nor asymmetric causality between fiscal deficits and inflation in Nigeria. This implies that the fiscal deficits in Nigeria are not inflationary; and also, that persistent double-digit inflation rates are not the causal agents spurring perennial increase in fiscal deficits in Nigeria. This study, therefore, concludes that fiscal deficits could be used to stimulate output level in Nigeria without fueling inflationary spiral in the economy. JEL Classification: C32, E17
... See alsoChaudhary and Parai (1991),Anoruo (2003),Lozano (2008),Sahan (2010),Metin (1998),Kia (2010), andErkam and Çetinkaya (2014). ...
Full-text available
Theoretically, fiscal deficit is inflationary but the sources of financing fiscal deficit may differ in terms of their impact on inflation. Question arises that what should be the least inflation cost source of financing? This study attempts to answer this question and explore the long run relationship among the sources to finance fiscal deficit and inflation. In so doing, the estimations have been done in four stages on the basis of categorisation of the deficit financing heads. In the first stage it has been tested that fiscal deficit along with money supply are inflationary. In the second stage fiscal deficit is bifurcated into two components, domestic borrowing and external borrowing for fiscal deficit. In the third stage, domestic borrowing is further divided into two heads, bank and non-bank borrowing. While in the fourth and last stage, bank borrowing is further categorised into two parts, borrowing from scheduled banks and central bank, and non-bank borrowing which comprises borrowing from National Saving Scheme for budgetary support. The Johansen Cointegration Technique is used for the first stage of estimation, while Auto Regressive Distributed Lag Model is employed for the rest of the three stages. The study finds that there is a long run relationship among sources of financing fiscal deficit and inflation. Inflation is positively affected by domestic borrowing, bank borrowing and borrowing from central bank, while central bank borrowing is more inflationary in nature. Consequently, fiscal deficit should be financed through external sources, non-bank and scheduled bank borrowings. JEL Classification: H62, H74, E31 Keywords: Deficit, State and Local Borrowing, Inflation
This paper aims to provide empirical evidences about the extent to which budget deficits contribute to influencing price stability within the Algerian economy, using unconstrained VAR models, and based on annual data base covering the period (1990-2019). The results of Granger causality tests revealed the absence of causal relationships between budget deficit and money supply in either direction, which means that budget deficit doesn't affect prices through the monetary channel, which doesn't support the fiscal dominance hypothesis (SW-H). Same results indicated that there're two-way causal relationships between budget deficit and price levels, which indicates a direct impact of budget deficit on prices, in line with the theory of financial origin of inflation (FTPL). These results were confirmed by the results of impulse response functions and variance decomposition, which showed that an important part of inflationary pressures in the Algerian economy is directly fueled by imbalances in the government budget.
In this article, in order to investigate the monetary policy interest rate pass-through process in Turkey, weekly data for the period January 01, 2011 - January 22, 2021 were analyzed with Residual Augmented Least Squares (RALS) methods and a non-normal approach was presented. In the first stage, the interest rate pass-through from the funding cost of the Central Bank of the Republic of Turkey (CRBT) to the Borsa Istanbul (BIST) overnight interest was investigated. According to the cointegration test results, CBRT funding cost and BIST overnight interest are co-integrated. According to the regression estimation results, although the pass-through from the CBRT funding cost to the BIST interbank overnight rate is close to 100%, but not complete. In the second stage, the pass-through from the CBRT funding cost and BIST interbank overnight interest to the bank rates analyzed. Among the CBRT funding cost and BIST interbank overnight interest rate and bank credit and deposit interest rates were cointegrated. According to the results of the regression estimates, the pass-through levels from the BIST interbank overnight interest rate to the bank deposit and loan rates are different levels. The interest pass-through levels of the mentioned variables are from strong to weak, respectively, in the form of auto loans, commercial loans, consumer loans, deposit and housing loans. According to the analysis findings, incomplete competitive pricing conditions prevail in the banking market. ------------------------ Bu makalede Türkiye’de para politikası faiz oranı geçişkenliği sürecini araştırmak için 01 Ocak 2011 - 22 Ocak 2021 dönemine ait haftalık veriler kullanılarak Kalıntılarla Arttırılmış En Küçük Kareler (RALS) yöntemleriyle analiz yapılmış ve normal olmayan bir yaklaşım sunulmuştur. İlk aşamada, Türkiye Cumhuriyet Merkez Bankası'nın (TCMB) fonlama maliyetinden Borsa İstanbul (BIST) bankalararası gecelik faizine doğru geçişkenlik araştırılmıştır. Eşbütünleşme testi sonuçlarına göre TCMB fonlama maliyeti ve BIST bankalarası gecelik faizi eşbütünleşiktir. Regresyon tahmin sonuçlarına göre, TCMB fonlama maliyetinden BIST bankalararası gecelik faizine geçişkenlik % 100’e yakın olsa da tam değildir. İkinci aşamada, TCMB fonlama maliyetinden ve BIST bankalararası gecelik faizinden banka faizlerine geçişkenlik incelenmiştir. TCMB fonlama maliyeti ve BIST bankalararası gecelik faizi ile kredi ve mevduat faizleri arasında eşbütünleşme ilişkisi bulunmuştur. Regresyon tahmin sonuçlarına göre BIST bankalararası gecelik faiz oranından banka mevduat ve kredi faizlerine geçişkenlik seviyeleri birbirlerinden farklıdır ve tam değildir. Bahse konu değişkenlerin faiz geçişkenlik seviyeleri güçlüden zayıfa sırasıyla taşıt kredisi, ticari kredi, ihtiyaç kredisi, mevduat ve konut kredisi şeklindedir. Analiz bulgularına göre incelenen dönemde bankacılık piyasasında eksik rekabetçi fiyatlama koşulları geçerlidir.
Full-text available
This study aims to investigate the effects of government budget deficit on inflation in Jordan, using data for the period 1976-2015. Both the Autoregressive Distributed Lag, ARDL co-integration technique and the Error Correction Model (ECM) methodology were used to demonstrate a long-term and short-term relationship between inflation and explanatory variables. By the means of cutting on government spending and stimulating economic growth to reduce inflation. JEL Classification: E31; H60.
Full-text available
Validity of the Quantity Theory of Money (QTM) continues to be heavily contested. The current examination is born out of the realization that there is no evidence for an economy using multiple currencies and deprived of monetary policy sovereignty. Using the Auto-Regressive Distributed-Lag approach to long-run association and co-integration analysis, we document weak evidence for the QTM for the period
Full-text available
zet Geleneksel yaklaşıma göre enflasyon her zaman ve her yerde parasal bir olgudur. Bununla birlikte yapılan araştırmaların çok bir kısmı, fiyat istikrarının sağlanmasında para politikasının tek başına yeterli olmadığını ve uygun maliye politikaları ile bir arada yürütülmesi gerektiğini ileri sürmektedir. Geleneksel yaklaşımın tersine fiyat düzeyinin mali teorisi (FTPL), maliye politikalarının, özellikle de bütçe açıklarının, enflasyonun belirleyicileri olduğunu iddia etmektedir. Bu çalışmada Türkiye'de 1987-2009 döneminde bütçe açıkları, para arzı artışı ve enflasyon arasındaki ilişki, eşbütünleşme teknikleri kullanılarak araştırılmaktadır. Elde edilen bulgular Türkiye'de olası bir FTPL yaklaşımını uzun dönemde destekler nitelikte olabilir. 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.
Full-text available
This paper examines the validity of fiscal theory of price level in the five selected SAARC countries, namely Bhutan, India, Nepal, Pakistan and Sri Lanka by using panel data analysis for the period 1990-2009. Specification tests, i.e. F-test and Hausman test indicate that the fixed effect model can be considered as the best model to examine the relationship between budget deficit and price level. Empirical findings also show that budget deficit is significant and negatively related with the price level in pooled least square, while fixed and random effect model explain that the budget deficit has no role in explaining the given scenario. The GDP per capita is positively and highly significant in all of the models, while openness is explaining its role in reducing the price level in the specified set of countries. The additional robustness tests are also performed to test the validity of results of the model. After removing the variable, i.e. GDPPC from the fixed effect model, the budget deficit (BD) significantly impacts on the SAARC price level. Our findings substantiate that fiscal theory of price level is not valid in the selected SAARC countries. This study opens new dimensions for policy planners, government agencies, NGO's and other donor agencies working in the SAARC region.
Full-text available
In this study we attempt to determine the long-run relationship between budget deficit and inflation in thirteen Asian developing countries, namely; Indonesia, Malaysia, the Philippines, Myanmar, Singapore, Thailand, India, South Korea, Pakistan, Sri Lanka, Taiwan, Nepal and Bangladesh. Using annual data for the period 1950-1999 our Granger causality within the error-correction model (ECM) framework suggest that all variables involved (budget deficits, money supply and inflation) are integrated of order one. Our ECM model estimates indicate the existence of a long-run relationship between inflation and budget deficits. Thus, we conclude that budget deficits are inflationary in Asian developing countries.
div>The Tanzanian economy has remained one of the limited numbers of countries that has experienced a relatively high inflation rate, accompanied by high fiscal deficits for a prolonged period in the absence of any hyperinflation. This paper examines the deficit-inflation relationship in the Tanzanian economy and establishes the causal link that runs from the budget deficit to the inflation rate usingcointegration analysis over the period 1967-2001. Some dynamic simulations are done to gauge the effect of a change in the budget deficit and gross domestic product on inflation over time. Due to monetisation of the budget deficit, significant inflationary effects are found for increases in the budget deficit. </div
Conventional notions suggest that persistently high budget deficits give rise to inflation, which monetary policy on its own is powerless to prevent. However, empirical evidence does not provide convincing support for such a hypothesis. This paper reexamines the issue in the case of Pakistan using Johansen cointegration analysis. The empirical results suggest that in the long-run inflation is not related to budget deficit but only to supply of money, and supply of money has no causal connection with budget deficit. Hence, the findings imply that the hard government budget constraint does not find empirical support for Pakistan.
Government in the economy of a country is responsible for various duties and to do these tasks uses the budget and fiscal policy as a planning and control tools. Because the different goals of economic balance in macro level such as fixing prices and unemployment inhibit any economic program is the priority, so can the government is using funds that involve income and expenses of the government to direct economic in reaching their goals in macro level. In developing countries lacked the private sector are strong, the role of government and its dimensions are larger tasks. The basic aim of the paper is to analyze the Relationship between government budget deficits and inflation in the Iran's economy. According to the positive and significant coefficient of government budget deficit, if budget deficit change to one percent, the inflation rate will change to 1.82 percent.
This paper attempts to offer evidence on the causal long term relationship between budget deficit, money growth and inflation in Nigeria. The test for stationarity using Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) test carried out to test the stationarity of the variables used in the work proved that the variables were stationary, though not in levels, but in first difference. The Johansen cointegration test employed suggests there is at least one cointegration vector among these variables. Under such circumstances, we employed a vector error correction (VEC) model. The results point to a close long-term relationship between inflation and money supply. With regard to the role of the fiscal deficit, the VEC estimates provide evidence that a one percentage point increase in the fiscal deficit (as a share of GDP) leads an increase of almost 0.94 percentage points in the M2 growth rate. The causal long term relationship between budget deficit, money growth and inflation was tested using Pair wise Granger causality test. The result from the test indicated that Money supply causes Budget deficit which means that the level of money supply in the Nigerian economy will determine whether there has been or there will be budget deficit. Inflation and budget deficit revealed a bilateral/feedback causality proving that the changes that occur in inflation could be explained by its on lag and also the lag values of budget deficit and in the same vein changes that occur in budget deficit is explained by its lagged values and the lagged values of inflation. Money supply on its relation to Inflation solely indicated a uni-directional causality running from it to inflation.
This paper applies the dynamic panel quantile regression (DPQR) model under the autoregressive distributional lag (ARDL) specification, and examines the deficit-inflation relationship in 91 countries from 1960 to 2006. The DPQR model estimates the impact of deficits on inflation at various inflation levels and allows for a dynamic adjustment with the ARDL specification. The empirical results show that the fiscal deficit has a strong impact on inflation in high-inflation episodes, and has a weak impact in low-inflation episodes. The results imply that fiscal consolidation would be more effective in price stabilization the higher the inflation rate is, and are consistent with the theoretical model of Catão and Terrones (2005).