Decomposing supply- and demand-driven inflation in Turkey

Okan Akarsu () and Emrehan Aktuğ ()
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Okan Akarsu: Central Bank of the Republic of Türkiye, CBRT
Emrehan Aktuğ: Sabancı University

Empirical Economics, 2025, vol. 69, issue 2, No 16, 1047-1077

Abstract: Abstract We document the demand- and supply-driven components of inflation in Türkiye by following the decomposition method of Shapiro (J Money Credit Bank, 2024). The results suggest that the recent surge in inflation, which began with the COVID-19 pandemic and deviated significantly from global inflation rates, reaching as high as 80%, was initially driven by supply factors. As monetary policy loosened, demand-driven inflation also increased; however, throughout the post-COVID period, supply-driven inflation consistently exceeded the demand-driven component in this high-inflation environment. Consistent with theory, oil supply and exchange-rate shocks increased the supply-driven inflation, while monetary policy tightening reduced the demand-driven inflation. This decomposition can potentially serve as a useful real-time tracker for policymakers.

Keywords: Inflation decomposition; Demand; Supply; Exchange rate pass-through (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E52 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-025-02754-9

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