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The Effect of Nominal Government Deficits on Economic Growth

Author

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  • Yesim Kustepeli

    () (DEU, Isletme Fakultesi, Iktisat Bolumu)

Abstract

It is basically accepted by now that there is a positive relationship between the nominal government deficits and inflation. Government deficits may be financed by monetary growth due to several reasons but whatever the reason, the result is an increase in inflation. This in turn may affect the growth of real GNP negatively, due to its adverse effects on the allocation of resources, on the labor market and on the decisions of firms. This paper combines these two links, i.e. nominal government deficits and inflation, and inflation and real GNP growth. It further shows the effect of nominal government deficits on the economic growth for Turkey. Our results from cointegration and causality tests show that for Turkey for the period of 1950- 2001, nominal government deficits led to increases in the monetary base only in the short run, causing inflation both in the short and the long run. The effect of inflation on real GNP growth is weak and in the reverse direction.

Suggested Citation

  • Yesim Kustepeli, 2003. "The Effect of Nominal Government Deficits on Economic Growth," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 3(1), pages 47-57.
  • Handle: RePEc:ege:journl:v:3:y:2003:i:1:p:47-57
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    References listed on IDEAS

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    1. Gylfason, Thorvaldur, 1998. "Output gains from economic stabilization," Journal of Development Economics, Elsevier, vol. 56(1), pages 81-96, June.
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    More about this item

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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