Searching for the Optimal Level: Inflation and Price Variability in Turkey

Karahan, Hatice; Yazgan, M. Ege

doi:10.1142/s0217590819500231

Cited by 2 publications

(2 citation statements)

References 28 publications

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“…Even if the rate of inflation, that purely money induced, is zero, our model suggests that optimal inflation is still positive. In the body of literature that establishes a linear relationship between inflation and relative price variability (see Karahan & Yazgan, 2018), the least distortionary level of inflation is found to be zero. On the contrary, Rotemberg's (1983) model suggests a non-zero level of optimal inflation which results from a lower markup associated with positive inflation (Rotemberg, 1996).…”

Section: Monetary and Real Factors In Inflationmentioning

confidence: 99%

“…This question is, however, quite distinct from the literature that explores the link between inflation and short‐run variability in relative prices. The relation has been found to be a linear one (though there is empirical evidence on nonlinear relation as well) in which the causality runs from the level of inflation to its variation across its components (for a recent review of the related literature see Karahan & Yazgan, 2018). In our case, the causation is from equilibrium changes in relative price to inflation.…”

Section: Introductionmentioning

confidence: 99%

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Inter‐sectoral relative price, inflation and structural transformation

Chattopadhyay

2022

The Manchester School

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While the pattern of composition of sectoral output and consumption are well stylised during growth and structural transformation of an economy, the evidence on the movement of inter-sectoral relative price is mixed across countries. This paper investigates how demand and supply side forces simultaneously shape structural transformation and the path of relative price in a two-sector economy comprising an agricultural and a non-agricultural sector.The model incorporates non-homothetic preference, heterogeneous sectoral production functions with heterogeneous and exogenous total factor productivity growth. We further investigate how the equilibrium path of relative price contributes to inflation measured by proportionate changes in the aggregate price level which is an index of sectoral prices. We find that the equilibrium rate of inflation is always positive during structural transformation.The rate of inflation increases with increase in growth rate of the non-agricultural sector and with a higher preference for agricultural goods, and reduces with an increase in the growth of the agricultural sector.

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Section: Monetary and Real Factors In Inflationmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Inter‐sectoral relative price, inflation and structural transformation

Chattopadhyay

2022

The Manchester School

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Threshold inflation and relative price variability – a proposal for inflation targeting in Lebanon

Rather,

Abosedra

2024

JEAS

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PurposeThe study investigates the impact of inflation on the variability of relative prices in the context of Lebanon.Design/methodology/approachUnlike the traditional method, which relies on the variance of cross-sectional price changes measured at specific points in time to gauge the variability in relative prices, we employ a more appropriate approach. Under this approach, we capture the dispersion in relative prices by estimating how widely (or closely) a set of commodity prices drift apart over a span of time, offering a more comprehensive assessment. Firstly, we employ Johansen’s cointegration test on rolling subsamples to determine the number of statistically significant cointegrating vectors among the prices of 12 major commodity groups. Under this approach, an increase in the number of significant cointegrating vectors indicates a reduction in relative price variability, while a decrease suggests the opposite. Subsequently, we employ ordinary least squares regression to analyze how the fluctuations in inflation affect the variability in relative prices. The sample period ranges from December 2007 to April 2021.FindingsThe empirical results indicate that there exists a certain threshold inflation rate corresponding to which the variability in relative prices is minimized. More importantly, consistent with the theoretical predictions, the results suggest that it is not inflation per se, but the deviation of inflation from the 3% threshold level in either direction that causes higher dispersion in relative prices.Research limitations/implicationsThe empirical findings from this study have crucial implications for the operation of monetary and fiscal policy. In particular, these findings suggest that stabilizing long-term inflation around a certain threshold rate will not only help to anchor inflation expectations effectively but will also minimize the welfare costs associated with inflation.Originality/valueGiven the rising inflationary pressure in the recent past and its welfare costs, the study assumes crucial importance in understating how fluctuations in inflation distort the relative price structure and eventually cause resource misallocations and economic inefficiency.

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Searching for the Optimal Level: Inflation and Price Variability in Turkey

Cited by 2 publications

References 28 publications

Inter‐sectoral relative price, inflation and structural transformation

Inter‐sectoral relative price, inflation and structural transformation

Threshold inflation and relative price variability – a proposal for inflation targeting in Lebanon

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