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

Abstract

This paper uses symmetric and asymmetric testing procedures to examine the issue of the relationship between the output gap and infl ation for the Turkish economy using data from 2002:01 to 2021:09. First, it analyses the cointegration by applying diff erent cointegration tests taking into account structural breaks and asymmetric behaviour to reveal whether the relation varies between sub-periods. Afterwards, it examines the asymmetric causality between diff erent shocks. Our empirical results indicate that there is a long-run relationship between series in the existence of two structural breaks and asymmetry. The results also show asymmetric causality running from positive (negative) output gap to positive (negative) infl ation shock, and running from negative infl ation shock to negative output gap shock. The overall fi ndings indicate the importance of having in mind the structural breaks and asymmetric behaviour of macroeconomic variables in policy-making processes, such as in Turkey during high and volatile infl ation.