Decoding Inflation: Role of Institutional Quality in Türkiye Using Advanced Econometric Techniques

Year 2024, , 1 - 35, 04.09.2024

Yıldırım Beyazıt Çiçen

https://doi.org/10.26650/ISTJECON2023-1263485

Abstract

Persistent inflation remains a significant economic challenge in Türkiye. The causes of high inflation have been examined through various factors, including supply and demand, as well as monetary and fiscal policies. However, few studies have included institutional factors in their analyses. The objective of this study is to determine whether institutional quality affects inflation in Türkiye. A novel and robust econometric analysis method is employed in this study. Between 2005 and 2019, the inflation rate, the International Country Risk Guide’s (ICRG) Political Risk Rating index, which measures the quality of institutional structure, and the changes in currency exchange rate basket variables in Türkiye were examined using the Fourier KPSS stationarity test and the Fourier Shin cointegration test. The results of the analysis indicate that inflation rate is co-integrated with institutional quality. The deterioration of institutional quality in Türkiye between 2005 and 2019 has been associated with an increase in inflation. While the implicit inflation targeting period in the inflation targeting regime implemented in Türkiye after 2002 was relatively successful, the explicit inflation targeting period failed to reduce inflation. The primary reason for the inability to achieve the specified inflation targets during these periods is the deterioration in the quality of institutions. It is also important to note that central bank independence is not immune to political influence and is one of the most important factors affecting inflation targeting.

JEL Classification : D02 , E31 , E58

Keywords

Institutional structure, Inflation, Inflation-targeting, Central bank, Fourier analysis

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