Nominal anchors of the Turkish economy: Evidence from a VAR model

Date

1997

Author

Erol, Turan

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Potential nominal anchors of inflation in Turkey arc examined through a vector autorcgressive (VAR) model. The investigation focused on three basic questions. What is the degree of inertia in Turkey? Is it possible to stabilize inflation through any nominal anchors? And, what are the implied costs of a disinflation program in terms of output losses? In addition to the two widely discussed nominal anchors, the exchange rate and money supply, the interest rate was also considered as a third nominal anchor. The variance decomposition analysis based on quarterly data indicates an inflation inertia of about 20 % in Turkey. The impulse-response analysis suggests that the exchange rate and the budget deficit or money fmancc arc the strongest nominal anchors of the Turkish economy. Moreover, the output loss is minimal under a disinflation program based on cuts in the budget deficit or money finance. Unexpectedly, the broad money supply M2Y, which includes foreign deposits, seems to be a moderate nominal anchor.

URI

https://hdl.handle.net/11511/109819

Collections

Department of Economics, Article