BUDGET DEFICIT AND INFLATION IN 11 EU COUNTRIES: NEW INSIGHTS FROM PANEL SMOOTH TRANSITION REGRESSION MODELING

Authors : Gökhan Çobanoğulları

Pages : 486-501

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Publication Date : 2024-06-30

Article Type : Research Paper

Abstract :The persistent increase in permanent budget deficits and inflation rates observed in developed nations since the 1970s has raised significant global economic concerns. This has prompted both academic and political communities to focus on deficit financing. Previous studies have considered the relationship between budget deficit and inflation to be linear. However, this study posits that the association between the two variables is nonlinear. This study aims to examine the threshold and asymmetric relationship between budget deficit and inflation across different political stability levels in 11 EU countries from 1997 to 2016, using the innovative Panel Smooth Transition Regression Model (PSTR). Empirical results indicate that as the budget deficit increases, the inflation rate rises, especially at a higher political risk index, validating the “Tanzi effect”. Conversely, in the low political risk index, as inflation rises, the budget deficit decreases, validating the “Patinkin effect”.
Keywords : Yumuşak Geçişli Panel Regresyon Modeli, Bütçe Açıkları, Enflasyon, Politik Risk Endeksi, 11 AB Ülkesi