Turkey's experience with disinflation: where did all the welfare gains go?

Abstract

This article measures the welfare gains from disinflation in Turkey during the 2000s. Estimated welfare gains exceed the real output gains, which is likely to arise from persisting allocative inefficiencies, pointing at the need for further structural and institutional reforms for the benefits of price stability to be utilized towards achieving sustainable development.

Keywords:

• Turkish inflation
• disinflation
• welfare costs of inflation

JEL Classification:

• E31
• E41
• I31

Acknowledgements

I am grateful to Hasan Ersel, Fatih Ozatay, Kivilcim Metin-Ozcan and Taner Yigit for their valuable comments and suggestions. Mustafa Kiraci worked on an earlier version of this article as a masters thesis under the author's supervision.

Notes

¹ Over the period, the average inflation rate was about 50%, and over the 1980s and 1990s, the average was 64%.

² Because of the crisis episodes in both the periods before and after reforms (see Altug et al., 2012, forthcoming), the comparison of the average figures for the two periods is deemed to be fair.

³ See also Lucas (2000), Serletis and Yavari (2004) and Gupta and Uwilingiye (2008).

⁴ CPIinf also passes the ADF test, however, when neither trend nor intercept terms are used, which also support its nonstationarity.

⁵ Test results are available from the author upon request.

⁶ where and

⁷ lny is the log of quarterly real GDP series (source: CBRT).

⁸ Given this, one could conjecture that the Per Capita GDP (PPP) would have been about 24 000 USD, instead of 15 000 USD, in 2010.

⁹ Even though not cointegrated individually, the null of cointegratedness cannot be rejected for the regression relationship between lnR, lny and lnm1.

¹⁰ Estimates are available from the author upon request.