The effect of inflation on the budget deficit in Turkiye: Evidence from cointegration test with multiple structural breaks

Abstract

In determining the relationship between the budget deficit and inflation in literature, the effect of the budget deficit on inflation has been widely focused on. Although the impact of inflation on the budget deficit is highly significant, there has been a lack of sufficient research on this matter. There are two different views put forward on this issue. The first of these is the Tanzi effect; argues that an increase in inflation will cause a real decrease in tax revenues and therefore the budget deficit will increase. The opposing view is known as the Patinkin effect and suggests that the budget deficit will decrease because inflation will reduce real public expenditures. In this study, the effect of inflation on the budget deficit was investigated for the period 1960 2022 in Turkiye. Considering that the data period may contain many structural breaks, Carrion-i-Silvestre unit root test and Maki cointegration test were used. The years 1995, 2002, 2007, 2011 and 2018 were determined as the break dates. According to the results, the inflation rate has an increasing effect on the budget deficit in the period when there is no break. The overall result did not change when the effect of breaks was included. With these findings, it can be said that the Tanzi effect is more dominant in Turkiye.