A Sectoral Approach to Inflation Expectations in the Turkish Economy: The Vector Error Correction Model (VECM) and Time-Varying LA-VAR Granger Causality Analysis

Abstract

The high inflation rates in Türkiye in recent years highlight the importance of expectations and motivate studies on this issue. This study employs a Vector Error Correction Model (VECM) alongside a Time-Varying LA-VAR Granger Causality framework to investigate the relationship between inflation expectations and the prices of goods and services in Türkiye over the period 2013:01–2023:12. The results demonstrate the existence of co-integrating links between the variables. The results show that an orthogonalized shock to goods price has a temporary effect on inflation expectations, but an orthogonalized shock to services price has a permanent effect on inflation expectations. In addition, according to time-varying Granger causality analysis, the service sector, in particular, has a significant impact on inflation expectations. In this context, expectations are a significant factor that limits the effectiveness of the central bank's monetary policies. Although it is not a task that monetary policy can carry out on its own, the central bank should implement regulations that ensure stability regarding price movements in the service sector.

Keywords

• Inflation Expectations
• Monetary Policy
• Türkiye
• Vector Error Correction Model

Türkiye Ekonomisinde Enflasyon Beklentilerine Sektörel Bir Yaklaşım: Vektör Hata Düzeltme Modeli (VECM) ve Zamanla Değişen LA-VAR Granger Nedensellik Analizi

Abstract

The high inflation rates of recent years in Türkiye reveal the importance of expectations and encourage studies on this subject. In this study, it is employed a Vector Error Correction Model (VECM) and Time-Varying LA-VAR Granger Causality Analysis to evaluate the relationship between inflation expectations and price of the goods and services in Türkiye from 2013m1 to 2023m12. The results demonstrate the existence of co-integrating links between the variables. The results show that an orthogonalized shock to goods price has a temporary effect on inflation expectations, but an orthogonalized shock to services price has a permanent effect on inflation expectations. In addition, according to time-varying Granger causality analysis, especially the service sector has a significant impact on inflation expectations. In this context, expectations are significant factor that limits the effectiveness of the central bank's monetary policies. The central bank should make stabilizing arrangements, especially regarding price movements in the service sector.

Keywords

• Enflasyon Beklentileri
• Para Politikası
• Türkiye
• Vektör Hata Düzeltme Modeli

References

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