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A Disaggregated Analysis of the Impact of Output Gap on Inflation and Implications for Monetary Policy

Oguz Atuk (), Utku Ozmen () and Cagri Sarikaya ()

Prague Economic Papers, 2018, vol. 2018, issue 6, 668-683

Abstract: This study investigates the sensitivity of Consumer Price Index (CPI) sub-items to output gap for an emerging market economy, Turkey. To this aim, we estimate standard Phillips Curve equations for each of the 152 sub-indices of the CPI and determine the goods and services that respond to output gap in a statistically and economically significant manner. Thereby, we propose an alternative view to assess core inflation as a complementary tool to better monitor underlying inflation with respect to its main drivers. Empirical findings show that about one-third of the consumer basket is affected by the output gap. Remaining items that are found to be insensitive to business cycle extensively co-move with import prices and exchange rate. The results imply that controlling inflation through counter-cyclical policies may be a more challenging issue, especially when external factors work in the opposite direction. Policy efforts to reduce exchange rate volatility and import content of aggregate production are as important as cyclical policies geared toward steering the economy with respect to its potential.

Keywords: business cycle; inflation; Phillips Curve; core inflation; Turkey (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.18267/j.pep.677

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