From borrowing to inflation: Untangling Türkiye's monetary puzzle

Dedeoglu, Dincer and Ogut, Kaan (2025) From borrowing to inflation: Untangling Türkiye's monetary puzzle. ACTA OECONOMICA, 75 (2). pp. 299-326. ISSN 0001-6373

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Abstract

This study investigates the dynamic impacts of public and private borrowing on inflation in Türkiye within the post-Keynesian framework of endogenous money supply. Employing a time-varying parameter vector autoregression (TVP-VAR) model, the study examines the evolving relationships between government bonds, private sector loans, money supply, and inflation from January 1986 to February 2024. The findings reveal significant time-varying effects, with public borrowing, mainly through the indirect monetization of government bonds, and private borrowing via credit expansion emerging as key drivers of inflation. The relative impacts of these factors evolve across different periods, shaped by Türkiye's economic transitions and policy changes. During the 1990s, high domestic borrowing to finance fiscal deficits contributed to inflationary pressure through indirect debt monetization. In the 2000s, capital inflows fueled by the global liquidity glut accelerated private credit growth, amplifying demand-pull inflation. After 2020, unconventional monetary policies and fiscal interventions resurged the inflationary impact of government bonds. The time-varying forecast error variance decompositions further highlight the shifting contributions of bonds and loans to inflation variability over time. These findings underscore the necessity of regulating both public and private borrowing and adopting dynamic, coordinated, and adaptive policy frameworks to effectively manage inflation in Türkiye. This study bridges the gap between global and local literature, providing valuable insights for policymakers seeking to achieve sustainable price stability and promote long-term economic resilience.

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