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Inflation Dynamics and Business Cycles

Suleyman Kal, Nuran Arslaner and Ferhat Arslaner

BIFEC Book of Abstracts & Proceedings, 2014, vol. 1, issue 2, 121-129

Abstract: The paper aims to investigate whether the effect of the backward-looking inflation expectations, nominal effective exchange rate, money supply, gross domestic product and import prices on inflation depends on business cycle. For this purpose, a two states Markov Switching Auto Regression model with time varying transition probabilities to a generic inflation model is implemented for the period 2003-2013. In this model the states are assigned whether output gap is positive or negative. The inflation forecasting in-sample and out-of-sample is also utilized by adopting mean squared error and Diebold Mariano test to measure explanatory and forecasting power of our model. Our main finding provides that the determinants of inflation have different dynamics during boom periods as compared to recessions

Keywords: Inflation; Output Gap; Exchange Rate Pass-Through; Markov Switching Autoregressions; Business Cycles (search for similar items in EconPapers)
JEL-codes: C32 E30 E31 E37 E58 (search for similar items in EconPapers)
Date: 2014
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