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

Öz

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

Anahtar Kelimeler

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

Kaynakça

1. Abeles, M., & Panigo, D. (2015). Dealing with cost-push inflation in Latin America: Multi- causality in a context of increased openness and commodity price volatility. Review of Keynesian Economics, 3(4), 517-535. google scholar
2. Acemoğlu, D., Johnson, S., Robinson, J., & Thaicharoen, Y. (2003). Institutional causes, macroeconomic asymptoms: Volatility, crises and growth. Journal of Monetary Economics, 50(1), 49-123. google scholar
3. Acemoğlu, D., Johnson, S., & Robinson, J. (2005). Institutions as the fundamental cause of long-run growth. In: Aghion, P., & Durlauf, S., Eds., Handbook of economic growth, Vol. 1A, North Holland, Amsterdam, 385-472. google scholar
4. Acemoğlu, D., Johnson, S., Querubin, P., & Robinson, J. A. (2008). When does policy reform work? The case of central bank independence. National Bureau of Economic Research, No. w14033. google scholar
5. Aguir, A. (2018). Central bank credibility, independence, and monetary policy. Journal of Central Banking Theory and Practice, 7(3), 91-110. google scholar
6. Aisen, A., & Veiga, F. (2008a). Political instability and inflation volatility. Public Choice, 135, 207-223. google scholar
7. Aisen, A., & Veiga, F. J. (2008b). The political economy of seigniorage. Journal of Development Economics, 87(1), 29-50. google scholar
8. Aizenman, J., Hutchison, M., & Noy, I. (2011). Inflation targeting and real exchange rates in emerging markets. World Development, 39(5), 712-724. google scholar

9. Aizenman, J. (2019). International reserves, exchange rates, and monetary policy: From the trilemma to the quadrilemma. In Oxford Research Encyclopedia of Economics and Finance. google scholar
10. Akgül, I., & Özdemir, S. (2018). Enflasyon-faiz oranı ve enflasyon-döviz kuru ikilemi: Geg programı döneminde Türkiye gerçeği. Ege Academic Review, 18(1), 153-166. google scholar
11. Alesina, A., Cohen, G. D., & Roubini, N. (1993). Electoral business cycle in industrial democracies. European Journal of Political Economy, 9(1), 1-23. google scholar
12. Aron, J. (2000). Growth and institutions: A review of the evidence. The World Bank Research Observer, 15(1), 99-135. google scholar
13. Bakir, C., & Öniş, Z. (2010). The regulatory state and Turkish banking reforms in the age of post-Washington Consensus. Development and Change, 41(1), 77-106. google scholar
14. Barro, R. J., & Sala-i-Martin, X. (2004). Economic growth. Cambridge, MA: MIT. google scholar
15. Becker, R., Enders, W., & Lee, J. (2006). A stationarity test in the presence of an unknown number of smooth breaks. Journal of Time Series Analysis, 27(3), 381-409. google scholar
16. Borio, C., & Disyatat, P. (2015). Capital flows and the current account: Taking financing (more) seriously (No. 525). Bank for International Settlements. google scholar
17. Cachanosky, N., & Mazza, F. J. F. (2021). Why did inflation targeting fail in Argentina?. The Quarterly Review of Economics and Finance, 80, 102-116. google scholar
18. Campillo M., & Miron, J. (1997). Why does inflation differ across countries? In: Reducing inflation: Motivation and strategy, University of Chicago Press, Chicago, 335-362. google scholar
19. Central Bank of the Republic of Türkiye (2023, 9 March). Fiyat İstikrarı ve Enflasyon. Access link: https://www.tcmb.gov.tr/wps/wcm/connect/TR/TCMB+TR/Main+Menu/Temel+Faaliyetler/ Para+Politikasi/Fiyat+Istikrari+ve+Enflasyon/#:~:text=Fiyat%20istikrar%C4%B1%20ise%20 para%20politikas%C4%B1n%C4%B1n,temel%20amac%C4%B1%2C%20fiyat%20 istikrar%C4%B1n%C4%B1%20sa%C4%9Flamakt%C4%B1r google scholar
20. Central Bank of the Republic of Türkiye (2024, 14 January). Yıllık Rapor 2003. Access link: https:// www.tcmb.gov.tr/wps/wcm/connect/667c7904-1baa-4ca3-9c7d-eb0a23d28826/2003_Yillik_ Rapor.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE-667c7904-1baa-4ca3-9c7d-eb0a23d28826-mh5zofC google scholar
21. Cubeddu, M. L. M., Krogstrup, S., Adler, G., Rabanal, M. P., Dao, M. C., Hannan, M. S. A., ... & Li, M. (2019). The external balance assessment methodology: 2018 update. International Monetary Fund. google scholar
22. Cukierman, A. (1992). Central bank strategy, credibility, and independence. MIT Press, Cambridge. google scholar
23. Cukierman, A., & Gerlach, S. (2003). The inflation bias revisited: theory and some international evidence. The Manchester School, 71(5), 541-565. google scholar
24. Cukierman, A., Miller, G. P., & Neyapti, B. (2002). Central bank reform, liberalization and inflation in transition economies—an international perspective. Journal of Monetary Economics, 49(2), 237-264. google scholar
25. Çiçen, Y. B. (2017). Kurumlar ve ekonomik performans ilişkisi: Teorik çerçeve. The Journal of International Scientific Researches, 2(7), 109-118. google scholar
26. Çiçen, Y. B. (2023). The nexus between institutional quality and inflation in emerging markets: A panel causality test with a Fourier Function. Ekonomika, 102(1), 140-152. google scholar
27. Demez, S., & Ustaoğlu, M. (2012). Exchange-Rate volatility’s impact on Turkey’s exports: An empirical analyze for 1992-2010. Procedia-Social and Behavioral Sciences, 41, 168-176. google scholar
28. Demiralp S. (2022, October). Merkez Bankası Bağımsızlığı ve Türkiye Tecrübesi. İstanpol. Access link: https://istanpol.org/post-merkez-bankasi-bag-ms-zl-ve-turkiye-tecr-besi google scholar
29. Demiralp, S., & Demiralp, S. (2019). Erosion of central bank independence in Turkey. Turkish Studies, 20(1), 49-68. google scholar
30. Dinçer, N., & Kandil, M. (2011). The effects of exchange rate fluctuations on exports: A sectoral analysis for Turkey. The Journal of International Trade & Economic Development, 20(6), 809-837. google scholar
31. Dornbusch, R. (1991). Exchange rates and inflation. Mit Press. google scholar
32. Ersel, H., & Özatay, F. (2008). Fiscal dominance and inflation targeting: Lessons from Turkey. Emerging Markets Finance and Trade, 44(6), 38-51. google scholar
33. Fazio, D. M., Silva, T. C., Tabak, B. M., & Cajueiro, D. O. (2018). Inflation targeting and financial stability: Does the quality of institutions matter?. Economic Modelling, 71, 1-15. google scholar
34. Fenira, M. (2014). Democracy: A determinant factor in reducing inflation. International Journal of Economics and Financial Issues, 4(2), 363. google scholar
35. Friedman M. (1963). Inflation causes and consequences, Asian Publishing House. google scholar
36. Garriga, A. C. (2016). Central bank independence in the world: A new data set. International Interactions, 42(5), 849-868. google scholar
37. Garriga, A. C., & Rodriguez, C. M. (2020). More effective than we thought: Central bank independence and inflation in developing countries. Economic Modelling, 85, 87-105. google scholar
38. Gelos, G., & Ustyugova, Y. (2017). Inflation responses to commodity price shocks-How and why do countries differ?. Journal of International Money and Finance, 72, 28-47. google scholar
39. Guisinger, A., & Singer, D. A. (2010). Exchange rate proclamations and inflation-fighting credibility. International Organization, 64(2), 313-337. google scholar
40. Gürkaynak, R. S., Kantur, Z., Taş, M. A., & Yıldırım, S. (2015). Monetary policy in Turkey after Central Bank independence. CEPR Discussion Papers, No. 10904. google scholar
41. Gürkaynak, R. S., Levin, A. T., Marder, A. N., & Swanson, E. T. (2007). Inflation targeting and the anchoring of inflation expectations in the western hemisphere. Series on Central Banking, Analysis, and Economic Policies, no. 11. google scholar
42. Hall, R. E., & Jones, C. I. (1999). Why do some countries produce so much more output per worker than others?. The Quarterly Journal of Economics, 114(1), 83-116. google scholar
43. Huang, H., & Wei, S. J. (2006). Monetary policies for developing countries: The role of institutional quality. Journal of International Economics, 70(1), 239-252. google scholar
44. Ibarra, R., & Trupkin, D. R. (2016). Reexamining the relationship between inflation and growth: Do institutions matter in developing countries?. Economic Modelling, 52, 332-351. google scholar
45. Kara, H., & Sarıkaya, Ç. (2021). Enflasyon dinamiklerindeki değişim: Döviz kuru geçişkenliği güçleniyor mu? (No. 2121). Working Paper. google scholar
46. Kara, H., & Öğünç, F. (2008). Inflation targeting and exchange rate pass-through: The Turkish experience. Emerging Markets Finance and Trade, 44(6), 52-66. google scholar
47. Khan, M., & Hanif, W. (2020). Institutional quality and the relationship between inflation and economic growth. Empirical Economics, 58(2), 627-649. google scholar
48. Kibritçioğlu, A. (2002). Causes of inflation in Turkey: A literature survey with special reference to theories of inflation. EconStor Open Access Articles and Book Chapters, 43-76. google scholar
49. Knack, S., & Keefer, P. (1995). Institutions and economic performance: cross-country tests using alternative institutional measures. Economics & Politics, 7(3), 207-227. google scholar
50. Koziuk, V. (2019). Independence of central banks, inflation and fractionalization of society in post-socialist countries. Journal of European Economy, 18(2), 226-244. google scholar
51. Kwiatkowski, D., Phillips, P. C., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root?. Journal of Econometrics, 54(1-3), 159-178. google scholar
52. Law, C. H., & Soon, S. V. (2020). The impact of inflation on income inequality: The role of institutional quality. Applied Economics Letters, 27(21), 1735-1738. google scholar
53. Leeper, E. M. (1991). Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies. Journal of Monetary Economics, 27(1), 129-147. google scholar
54. Leigh, D., & Rossi, M. (2002). Exchange rate pass-through in Turkey. IMF Working Papers, 2002(204). google scholar
55. Lim, J. J. (2021). The limits of central bank independence for inflation performance. Public Choice, 186(3), 309-335. google scholar
56. Lin, S., & Ye, H. (2009). Does inflation targeting make a difference in developing countries? Journal of DevelopmentEconomics, 89, 118-123. google scholar
57. Luca, D. (2022). National elections, sub-national growth: The politics of Turkey’s provincial economic dynamics under AKP rule. Journal of Economic Geography, 22(4), 829-851. google scholar
58. McCarthy, J. (2007). Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies. Eastern Economic Journal, 33(4), 511-537. google scholar
59. Minea, A., Tapsoba, R., & Villieu, P. (2021). Inflation targeting adoption and institutional quality: Evidence from developing countries. The World Economy, 44(7), 2107-2127 google scholar
60. Mishkin, F. S., & Posen, A. (1998). Inflation targeting: lessons from four countries. NBER Working Paper Series, No. 6126. google scholar
61. Narayan, P. K., Narayan, S., & Thuraisamy, K. S. (2014). Can institutions and macroeconomic factors predict stock returns in emerging markets?. Emerging Markets Review, 19, 77-95. google scholar
62. Neyaptı, B. (2012). Monetary institutions and inflation performance: cross-country evidence. Journal of Economic Policy Reform, 15(4), 339-354. google scholar
63. North, D. C. (1993). Institutions and credible commitment. Journal of Institutional and Theoretical Economics ( JITE)/Zeitschrift für die gesamte Staatswissenschaft, 11-23. google scholar
64. Obstfeld, M., & Zhou, H. (2023). The global dollar cycle (No. w31004). National Bureau of Economic Research. google scholar
65. Öniş, Z. (2009). Beyond the 2001 financial crisis: The political economy of the new phase of neo-liberal restructuring in Turkey. Review of International Political Economy, 16(3), 409-432. google scholar
66. Özatay, F. (2015). 2000>li yıllarda Türkiye ekonomisi. İktisat İsletme ve Finans, 30(350), 09-24. google scholar
67. Posen, A.S. (1995). Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence. NBER Macroeconomics Annual, 10, 251-274. google scholar
68. Samadi, A. H., Marzban, H., & Owjimehr, S. (2017). Inflation bias, time inconsistency of monetary and fiscal policies and institutional quality. İnternational Journal of Business and Development Studies, 9(1), 27-45. google scholar
69. Samarina, A., & De Haan, J., 2014. Right on target: Exploring the factors leading to inflation targeting adoption. Contemporary Economic Policy, 32, 372-389. google scholar
70. Svensson, L. E. (2010). Inflation targeting. In Handbook of monetary economics (Vol. 3, pp. 12371302). Elsevier. google scholar
71. The PRS Group (2024, 14 January). International Country Risk Guide Methodology. Access link: https://www.prsgroup.com/wp-content/uploads/2012/11/icrgmethodology.pdf google scholar
72. TR Ministry of Treasury and Finance (2023, 20 December). Statistics. Access link: https://www.hmb. gov.tr/kamu-finansmani-istatistikleri google scholar
73. Tsong, C. C., Lee, C. F., Tsai, L. J., & Hu, T. C. (2016). The fourier approximation and testing for the null of cointegration. Empirical Economics, 51, 1085-1113. google scholar
74. Turkish Statistics Institute (2024, 19 April). Consumer Price Index Statistics Table. Access link: https:// data.tuik.gov.tr/Bulten/blo?p=KMExlm5AVU2ln21dc2evQ2SnPKPmGEBqV6H8CcJSjN NBzZZT2CJNzYtIqx1WGQK8 google scholar