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

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  • Yildirim Beyazit Cicen

    (Gumushane University, Faculty of Economics and Administrative Sciences, Department of Economics, Gumushane, Turkiye)

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.

Suggested Citation

  • Yildirim Beyazit Cicen, 2024. "Decoding Inflation: Role of Institutional Quality in Türkiye Using Advanced Econometric Techniques," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 73(74-1), pages 1-35, June.
    • Handle: RePEc:ist:journl:v:73:y:2024:i:1:p:1-35
    DOI: 10.26650/ISTJECON2023-1263485
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    More about this item

    Keywords

    Institutional structure; Inflation; Inflation-targeting; Central bank; Fourier analysis JEL Classification: D02 ; E31 ; E58;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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