Analysis of inflation dynamics in Turkey: a New Keynesian Phillips Curve approach

Eruygur, Ayşegül
The main aim of this thesis is to explain the inflation dynamics in Turkey within a theoretically consistent empirical framework. The New Keynesian Phillips Curve (NKPC) is chosen as the basis model for our analysis because, by describing the inflation process within an intertemporal optimizing dynamic general equilibrium model, it provides a rigorous analytical groundwork for credible welfare and policy analysis. We have contributed to the literature by developing a NKPC formulation that is novel in the literature: A constant elasticity of substitution (CES) type of production function incorporating imported and domestically produced intermediate goods was combined with incomplete exchange rate pass through to import prices. The short-run inflation dynamics were analyzed within the context of this new specification by estimating the model’s highly nonlinear structural parameters that capture the price-setting behavior in Turkey for period 1988:1 - 2009:4. Our findings suggest that this NKPC formulation can explain the 1994 and 2000-01 crises as well as the current environment of low inflation achieved with the adoption of the implicit and fully fledged inflation targeting regimes quite well. As a policy application we explored the effects of the inflation targeting framework adopted after the 2000-01 crises on the parameters characterizing the inflation process in Turkey. The subsample econometric results suggested that the inflation targeting framework applied was quite successful in decreasing inflation inertia in Turkey. Thus, should the success of the inflation targeting regime continue, this should be taken as an opportunity to reduce inflation substantially with very low output losses.
Citation Formats
A. Eruygur, “ Analysis of inflation dynamics in Turkey: a New Keynesian Phillips Curve approach ,” Ph.D. - Doctoral Program, Middle East Technical University, 2011.