A Disaggregated Analysis of the Impact of Output Gap on Inflation and Implications for Monetary Policy

Abstract

This study investigates the sensitivity of Consumer Price Index (CPI) sub-items to output gap for an emerging market economy, Turkey. To this aim, we estimate standard Phillips Curve equations for each of the 152 sub-indices of the CPI and determine the goods and services that respond to output gap in a statistically and economically significant manner. Thereby, we propose an alternative view to assess core inflation as a complementary tool to better monitor underlying inflation with respect to its main drivers. Empirical findings show that about one-third of the consumer basket is affected by the output gap. Remaining items that are found to be insensitive to business cycle extensively co-move with import prices and exchange rate. The results imply that controlling inflation through counter-cyclical policies may be a more challenging issue, especially when external factors work in the opposite direction. Policy efforts to reduce exchange rate volatility and import content of aggregate production are as important as cyclical policies geared toward steering the economy with respect to its potential.

Küreselleşme ve Enflasyon

“…Additionally, it is imperative to stress the fact that the inflation inertia play a decisive role in inflation. Furthermore, Atuk et al, (2018), andDemir (2018) observed that prices in Turkey respond proportionally to shifts in the exchange rate and import prices. According to the results of our study, throughout the period 2003-2020, overall prices in Turkey were extremely prone to fluctuations in exchange rates, inferring that the exchange rate's dominant role from prior years continues to persist.…”

“…Furthermore, remarking on the pass-through of global output gaps into inflation, Eren and Çiçek (2009) observed that globalization has an explicit impact on domestic inflation, primarily on the commodities and services that are eligible for foreign trade. Atuk et al, (2018) studied the susceptibility of sub-indices of the producer price index to the domestic output gap while carrying out the Philips curve estimation in this respect. The results illustrated that the output gap resulted in a shift of one third (1/3) of the 152 sub-indices of PPI.…”

Türkiye’de döviz kurlarının enflasyon üzerindeki asimetrik etkileri: Birleştirilmiş ve ayrıştırılmış verilerin açıklanması

“…The results document that food inflation and the US dollar exchange rate significantly affect inflation volatility in Turkey. Moreover, Atuk et al (2018) investigate the inflation dynamics in Turkey at the disaggregated level. They employ 152 subcomponents of general CPI for the 2004-2016 period with quarterly data for analyzing the sensitivity of different goods and services to the output gap.…”

Symmetric and Asymmetric Dynamics of Output Gap and Inflation Relation for Turkish Economy

“…At the same time, the money bias also implies macroeconomic linkages between real activity and price movement, and the monetary policy is eff ective on the real and nominal variables (e.g., Mankiw and Reis, 2002;Neiss and Nelson, 2005;Rudd and Whelan, 2005;Gali, 2008). A growing body of NKPC and HNK-PC literature reports that the output gap has a signifi cant eff ect on demand-side infl ation; see, e.g., Roberts (1995), Neiss and Nelson (2005), Zhang et al (2008), Liu (2011), andLai (2017) for the USA; Neiss and Nelson (2005) for the USA, UK and Australia; Zhang and Murasawa (2011) for China; Öğünç and Sarıkaya (2011), Alp et al (2012), Saraçoğlu et al (2014), Atuk et al (2018 and Biçer et al (2021) for Turkey. The common feature of these studies is that they are based on symmetrical assumptions implying that a positive and negative output gap have similar eff ects on infl ation and that the relation is independent of conditions of the economy such as structural changes, high infl ation, high volatility, and business cycles.…”