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Cross-Sectional Relative Price Variability and Inflation in Turkey: Time Varying Estimation

Author

Listed:
  • Rahmi Yamak

    (Department of Econometrics, Karadeniz Technical University, Trabzon, Turkey.)

  • Havvanur Feyza Erdem

    (Department of Econometrics, Karadeniz Technical University, Trabzon, Turkey.)

Abstract

This study investigates the empirical validity of the variability hypothesis in Turkey for the period of February 2005-November 2015, by using cross-sectional relative price data and by focusing on the assumptions of linearity and stability. The linearity assumption between the two variables is ensured by estimating quadratic regression equation. The assumption of stability is secured by utilizing the Kalman filter approach. The Kalman filter estimates of the regression coefficients suggest that there exists a time varying U-shaped relationship between inflation and cross-sectional relative price variability in Turkey. Time variation on the regression coefficients and the U-shaped curve is significant. The annualized inflation rate which minimizes cross-sectional relative price variability varies from 8.7% to 9.4%.

Suggested Citation

  • Rahmi Yamak & Havvanur Feyza Erdem, 2016. "Cross-Sectional Relative Price Variability and Inflation in Turkey: Time Varying Estimation," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 20(1), pages 69-80, Winter.
    • Handle: RePEc:eut:journl:v:20:y:2016:i:1:p:69
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