FISCAL DEFICITS, INFLATIONARY PRESSURES AND FINANCIAL FRAGILITY IN TÜRKIYE: AN EMPIRICAL MACROECONOMIC ASSESSMENT

Abstract

Fiscal deficit, inflationary pressures, and financial vulnerability in Türkiye are investigated in light of macroeconomic vulnerability and predominant risk dynamics. In developing countries, external financing dependence is influenced by the volatility of capital flow and a prolonged inflationary trend. Therefore, the sustainability of macroeconomic stability depends on both fiscal restraint and credible monetary policy. Because of currency fluctuation, inflationary trend shift and policy transformation after 2018; Türkiye provides a particularly relevant case for examining these dynamics. It was argued that financial vulnerability in Turkey is not caused solely by inflation trends or short-term monetary indicators but also significantly affected by the ability to achieve fiscal balance and to stabilise the economy structurally. The study investigates the impact of budget deficit and inflation on financial vulnerability indicators in Turkey. The empirical studies are conducted using regression analysis over annual macro-economic data. The statistical explanatory power of the total estimated model is high (approximate R² = 0.44). Hence, fiscal and macroeconomic variables contribute to explaining the dynamics of financial vulnerability. As per empirical findings, there is a highly significant effect of the budget deficit variable to financial vulnerability at 1% significance level. To be more specific, an increase in fiscal imbalance causes a considerable increase in the macro-financial vulnerability indicator. Therefore, maintaining fiscal sustainability and coordinating macro-economic policies have been identified as very important for ensuring financial stability. On the other hand, while inflation has no statistically significant impact in the estimated framework, it indicates that financial vulnerability in Turkey is more related with the structural fiscal problems and the dominant risk dynamics than short-terms inflation fluctuations. This study makes an important contribution to the literature as it investigates the relationships among fiscal deficit, inflationary pressures and financial vulnerability under the framework of developing markets. Moreover, this study offers an integrated macroeconomic approach by examining the interactions among these elements in depth. Finally, this study provides meaningful policy advice on strengthening fiscal discipline, developing a coordinated mechanism in the macroeconomic field, and enhancing structural resilience to achieve long-term financial stability and sustainable economic confidence in Turkey.