THE EFFECT OF DOMESTIC AND EXTERNAL DEBT ON INFLATION IN TURKIYE: AN ECONOMETRIC ANALYSIS

This study investigates the impact of domestic and external public debt on inflation in Turkiye using the Autoregressive Distributed Lag (ARDL) cointegration method. Public debt is a vital government financing tool alongside taxation, with policymakers selecting debt instruments based on economic conditions and financing needs. Our empirical findings demonstrate that different types of public debt exert distinct effects on inflation in both the short and long run. In the long run, a 1% increase in the domestic debt stock reduces inflation by 0.3%, while a 1% increase in the external debt stock increases it by 0.88%. In the short run, the dynamics exhibit a reversal. A 1% rise in domestic debt slightly increases inflation by 0.02%, whereas a similar increase in external debt reduces it by 0.5%. It has been determined that the error correction coefficients were found to be negative and significant. This fact confirms a stable long-term relationship between the variables. These results highlight the critical role of careful debt management in controlling inflationary pressures and supporting macroeconomic stability in Turkiye. When borrowing is considered, it is essential to take into account the maturity of the debt, the interest rate, and the prevailing economic conditions of the country. Therefore, careful attention is required in order to manage the potential impact on inflation over time.