Volume 11 - Volume 11
An Analysis of the Dynamic Relationships between Inflation Volatility, Exchange Rate and Output Gap Volatility in Turkey
Abstract
This study investigates the short and long-run relationships between Inflation volatility, exchange rate, and output gap volatility using the ARDL bounds testing approach in Turkey. Also, we repeat the
estimates by using the output gap as well. Moreover, we examine the causal relationship among these
variables by using Toda-Yamamoto and frequency domain causality tests. For this purpose, the study
uses quarterly time series data between 2005 Q1 and 2020 Q4. Both short and long-run results of the
ARDL estimates indicate that there are statistically significant relationships between exchange rate
and inflation volatility, between output gap volatility and inflation volatility, and between the output
gap and inflation volatility. As expected long-run effect of the exchange rate on inflation, volatility is
negative, and the effects of both output volatility and output gap on inflation volatility are positive.
Also, causality tests results indicate that changes in the exchange rate, output gap volatility, and output gap will have permanent and temporary causal effects on inflation volatility. Therefore, the study results provide new evidence about the exchange rate, output gap volatility, and output gap. The
policymakers should carefully consider these results to implement appropriate policies to reduce
inflation volatility.
Paper Details
PaperID: 2503
Author's Name: Mustafa Özer and Sevilay Küçüksakarya
Volume: Volume 11
Issues: Volume 11
Keywords: Inflation Volatility, Output Gap/Volatility, ARDL Bounds Testing Approach, Toda-Yamamoto Causality Test, Frequency Domain Causality Test.
Year: 2021
Month: August
Pages: 4772-4787