RELATIVE PRICE VARIABILITY AND INFLATION IN TURKEY: RESULTS FROM KALMAN FILTER ESTIMATION

Rahmi Yamak, Havvanur Feyza Erdem and Sinem Koçak
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Rahmi Yamak: Karadeniz Technical University, Department of Econometrics, Turkey
Havvanur Feyza Erdem: Karadeniz Technical University, Department of Econometrics, Turkey
Sinem Koçak: Karadeniz Technical University, Department of Econometrics, Turkey

Studii Financiare (Financial Studies), 2017, vol. 21, issue 1, 28-40

Abstract: This study re-examines the relationship between inflation rate and relative price variability in Turkey for the period of February 2005November 2015, by relaxing the assumptions of linearity and stability. The linearity assumption between the two variables is relaxed by estimating quadratic regression equation. The assumption of stability is removed by utilizing the Kalman filter approach. The Kalman filter estimates of the regression coefficients are found to satisfy the Ushaped relationship between inflation and relative price variability. Time variation on the regression coefficients and the U-shaped curve is significant. The annualized inflation rate which minimizes relative price variability varies from 4.26% to 4.93%.

Keywords: Time Varying Coefficient; Optimal Inflation; UShape; Kalman Filter; Relative Price Variability (search for similar items in EconPapers)
JEL-codes: C22 E30 E31 (search for similar items in EconPapers)
Date: 2017
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