The time-varying effect of inflation uncertainty on inflation for Turkey

ABSTRACT

We investigate the effect of inflation uncertainty on inflation from January 1982 through March 2016 for Turkey by using the Stochastic Volatility in Mean model with time-varying parameters. Our empirical evidence from consumer price index (CPI) inflation suggests that the observed positive relationship between inflation and inflation uncertainty is not robust. This positive relationship diminishes after 2002. This finding is valid for all five subcomponents of CPI inflation; however, for Health Services, Transportation Services, and Recreational and Cultural Services, an inflation-positive association is reported after 2010.

KEYWORDS:

• Inflation
• inflation uncertainty and TVP-SVM

JEL CLASSIFICATIONS:

• E31
• C11
• C15
• C22

Acknowledgement

We would like to thank Rana Nelson for her helpful comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplementary material

Supplemental data for this article can be accessed here.

Notes

¹ Various empirical studies for the inflation and inflation uncertainty relationship use ARCH-M models: Grier and Perry (1998), Apergis (2004), Fountas, Ioannidi, and Karanasos (2004), Conrad and Karanasos (2005), Berument and Dincer (2005). Nas and Perry (2000) and Erkam (2008) also find empirical evidence that inflation uncertainty affects inflation for Turkey.

² Berument, Yalcin, and Yildirim (2009) find empirical evidence that innovation in inflation uncertainty increases inflation.

³ Evans (1991) and Berument, Kilinc, and Ozlale (2005) are examples of inflation uncertainty measures for the Kalman Filter method.

⁴ In order to grantee to have a finite mean for each inflation series, we perform the Augmented Dickey–Fuller and Phillips–Perron unit root tests (not reported to save space). The test statistics suggest that all the inflation series are I(0).

⁵ For more information about the values of the hyper-parameters of independent priors for as described in Equation (4) of Chan (2015).

⁶ This period can be characterized by a high public deficit, a high interest rate and economic crises, such as in April 1994 and from November 2000 to February 2001. Also, Turkey experienced effects of external crises such as the East Asian crises in July 1997 and the Russian crises in 1998.