Effects of Exchange Rate, Output Gap, and Output Gap Volatility on Inflation Volatility in Turkey

Mustafa Özer (), Zoran Grubišić () and Sevilay Küçüksakarya ()
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Mustafa Özer: Anadolu University, FEAS, Department of Economics, Eskişehir, Turkey
Zoran Grubišić: Belgrade Banking Academy, Faculty for Banking, Insurance and Finance, Belgrade, Serbia
Sevilay Küçüksakarya: Anadolu University, FEAS, Department of Economics, Eskişehir, Turkey

Journal of Central Banking Theory and Practice, 2023, vol. 12, issue 1, 5-26

Abstract: This study first investigates the short and long-run effects of exchange rate, output gap and output gap volatility on inflation volatility in Turkey by using the ARDL bounds testing approach. Second, we also examine the causal relationship among these variables by using Toda-Yamamoto and frequency domain causality tests developed by Breitung and Candelon. The results of the ARDL estimates indicate that the exchange rate, output gap and output gap volatility have statistically significant effects on inflation volatility. Also, causality tests results indicate that changes in the exchange rate, output gap volatility, and output gap will have permanent and temporary causal effects on inflation volatility. The policymakers should carefully consider these results to implement appropriate policies to reduce inflation volatility. The finding that the shocks are of temporary nature will have particularly important implications on the policies fighting against the inflation. This study contributes to the empirical inflation literature by identifying both short run and long run effects of the exchange rate and output gap volatility and output gap together, as well as by providing evidence about the structure of the shocks created by these variables on inflation volatility. This study also identifies the sources of temporary and permanent shocks of inflation volatility.

Keywords: Inflation volatility; output gap/volatility; ARDL Bounds testing approach; Toda-Yamamoto causality test; Frequency Domain Causality Test. (search for similar items in EconPapers)
JEL-codes: C22 E31 F31 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cbk:journl:v:12:y:2023:i:1:p:5-26

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