An Estimation of the Open Economy Hybrid New Keynesian Phillips Curve for Turkey
An Estimation of the Open Economy Hybrid New Keynesian Phillips Curve for Turkey

Summary/Abstract: This study examines the inflation phenomenon employing monthly data set for the period 2002:01-2020:07 in Turkey. We separate the effects of dependency on imported intermediate goods and inputs in production using two different exchange rates. In this way, the direct effects arising from the USD / TL exchange rate and the indirect effects arising from the real effective exchange rate are revealed separately. In doing so, we also compare the sub-periods in which two separate trends occur in exchange rates. The results reveal that the real effective exchange rate has a more substantial effect. While this effect becomes more evident when the TL depreciates, it is seen that the USD / TL exchange rate is more determinant when the TL is stable. We find that both lagged and expected effects on inflation have a similar magnitude effect. This situation emphasizes the inertia and the importance of expectations in inflation. When the exchange rate increases, the effect of future expectations increases even more. The expected theoretical effect of the domestic output gap on inflation is statistically insignificant. According to the estimated model results, the effect of structural problems on inflation is relatively high and hampers price stability.

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