Is There a Causality Relationship Between Budget Deficit and Inflation Ratio During High Inflation Period? Case of Turkey Between 1978 and 2002

In this study it is analyzed whether there is a cause-and-effect relationship between inflation and budget deficit in Turkey with the annual data covering the time period between 19782002 when inflation was high and chronic. Econometric methods used in the study is based on the Johansen co-integration analysis and Granger causality connected error correction model. Empirical results suggest that in the longrun budget deficit and inflation is co-integrated, while budget deficit is Granger cause of inflation in short-run. However, inflation is not Granger cause of budget deficit. In other wordse causality is unilateral. The research also found that, response of inflation to a percentage increase in budget deficit is greater than ten percent in short-run.