Price level convergence in Turkey

ABSTRACT

This paper examines price convergence among 26 regions of Turkey using general and disaggregated monthly consumer prices between 2005 and 2019. In contrast to previous studies, the results provide evidence for convergence clubs (multiple equilibria) and support the heterogeneity of consumer prices across Turkish regions. This finding is particularly valid for the disaggregated prices where there exist two to four clubs. There is also an increase in the number of convergence clubs in recent years. That is, market integration or the law of one price in Turkey does not appear to be achieved not only for the prices of nontradable goods but also for those of tradable goods either, most likely due to a combination of factors including higher exchange rate volatility, rising inflation and unrelenting regional socio-economic disparities. Our results show that the inflation-targeting regime does not help converge the consumer price levels across the regions.

KEYWORDS:

• Club convergence
• convergence
• consumer prices
• log t test
• Turkey

JEL CLASSIFICATION:

• C23
• E31
• O18

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Before 2006, the CBRT had adopted an implicit inflation-targeting regime between 2002 and 2005.

² We consider regional price convergence within the framework of the club convergence hypothesis. Accordingly, if regions have different initial conditions and some other attributes such as initial income levels, the stocks of physical and human capital (e.g. level of literacy), or location (geography, climate), a group of regions may approach a particular equilibrium due to those common drivers and form clusters or clubs. In contrast to previous approaches that select the clubs according to some a priori criteria such as geographical regions, the PS methodology uses endogenized grouping to identify club convergence by not specifying the factors that contribute to multiple equilibria (clubs).

³ We also used the Hamilton filter as a robustness check. The results showed an increase in the number of convergence clubs in a few cases. As the results did not change qualitatively, we proceeded with the HP filter to allow for comparisons with similar studies in the literature. Also, note that the Hamilton filter cuts the first 35 observations and leaves 3,952 observations for the analysis.

⁴ We discard the initial 30% of the sample. PS suggest that 0.3 is sufficient. The results did not change when we discarded the initial 20% of the sample.

⁵ Antalya, which is one of two divergent regions, is known to be the most developed province in greenhouse cultivation. The second region (Mardin, Batman, Sirnak and Siirt), has the highest unemployment rates in Turkey. These two characteristics can largely explain their relatively lower consumer price levels and hence their divergence status.

⁶ The conventional use of east/west dualism in Turkey as a reflection of regional income disparities does not seem sensible here. There is no distinct geographic pattern in the club convergence results of general consumer prices.

⁷ Turkey has a comprehensive public healthcare system across the country. Moreover, residents can also get medical care at discounted fees from contracted private hospitals as well.

⁸ Moreover, Turkish Lira’s depreciation could also motivate agricultural producers to export, leading to divergence even in food prices across regions.