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Inflation targeting, flexible exchange rates and inflation convergence

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  • Hakan Yilmazkuday

Abstract

Using a disaggregated level Consumer Price Index (CPI) data, this article compares convergence properties of regional inflation rates in a small open economy, Turkey, between pre-inflation-targeting and inflation-targeting periods, where the latter also corresponds to a flexible exchange rate regime. It is found that during the inflation-targeting period, Turkish regional inflation rates have converged to each other in terms of CPI groups with relatively nontradable components, while they have diverged from each other in terms of CPI groups with relatively tradable components. Since a common and sound monetary policy among the regions of a country is supposed to have a convergence effect on regional inflation rates according to the conventional wisdom, the results for CPI groups with relatively tradable components require further attention and have significant policy implications, especially for inflation-targeting countries using flexible exchange rate regimes.

Suggested Citation

  • Hakan Yilmazkuday, 2013. "Inflation targeting, flexible exchange rates and inflation convergence," Applied Economics, Taylor & Francis Journals, vol. 45(5), pages 593-603, February.
    • Handle: RePEc:taf:applec:45:y:2013:i:5:p:593-603
    DOI: 10.1080/00036846.2011.608642
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    1. repec:zbw:bofitp:2008_013 is not listed on IDEAS
    2. Arestis, Philip & Chortareas, Georgios & Magkonis, Georgios & Moschos, Demetrios, 2014. "Inflation targeting and inflation convergence: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 285-295.
    3. Elena Deryugina & Natalia Karlova & Alexey Ponomarenko & Anna Tsvetkova, 2019. "The role of regional and sectoral factors in Russian inflation developments," Economic Change and Restructuring, Springer, vol. 52(4), pages 453-474, November.
    4. Giray GOZGOR, 2013. "Unemployment Persistence and Inflation Convergence: Evidence from Regions of Turkey," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 13(1), pages 55-64.
    5. Ana María Iregui & Jesús Otero, 2017. "Testing for spatial market integration: evidence for Colombia using a pairwise approach," Agricultural Economics, International Association of Agricultural Economists, vol. 48(6), pages 743-753, November.
    6. Paweł Gajewski, 2017. "Sources of Regional Inflation in Poland," Eastern European Economics, Taylor & Francis Journals, vol. 55(3), pages 261-276, May.
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    8. Mentz, Markus & Sebastian, Steffen P., 2003. "Inflation convergence after the introduction of the Euro," CFS Working Paper Series 2003/30, Center for Financial Studies (CFS).
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    Cited by:

    1. Hakan Yilmazkuday, 2007. "Inflation targeting supported by managed exchange rate," Applied Economics, Taylor & Francis Journals, vol. 39(16), pages 2011-2026.
    2. Filiz Yesilyurt & J. Elhorst, 2014. "A regional analysis of inflation dynamics in Turkey," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 52(1), pages 1-17, January.
    3. Yilmazkuday, Hakan & Akay, Koray, 2008. "An analysis of regime shifts in the Turkish economy," Economic Modelling, Elsevier, vol. 25(5), pages 885-898, September.
    4. Yu Hsing, 2020. "A Simultaneous-Equation Model of Estimating the Response of the Consumer Price to Exchange Rate Movements in Thailand," Business and Economic Research, Macrothink Institute, vol. 10(1), pages 284-293, March.
    5. Yazgan M. Ege & Yilmazkuday Hakan, 2005. "Inflation Dynamics of Turkey: A Structural Estimation," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-15, March.
    6. Elena Deryugina & Natalia Karlova & Alexey Ponomarenko & Anna Tsvetkova, 2019. "The role of regional and sectoral factors in Russian inflation developments," Economic Change and Restructuring, Springer, vol. 52(4), pages 453-474, November.
    7. Giray GOZGOR, 2013. "Unemployment Persistence and Inflation Convergence: Evidence from Regions of Turkey," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 13(1), pages 55-64.
    8. Arestis, Philip & Chortareas, Georgios & Magkonis, Georgios & Moschos, Demetrios, 2014. "Inflation targeting and inflation convergence: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 285-295.
    9. Alejandro C. García-Cintado & Diego Romero-Ávila & Carlos Usabiaga, 2016. "The economic integration of Spain: a change in the inflation pattern," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 25(1), pages 1-41, December.
    10. Beylunioğlu, Fuat C. & Yazgan, M. Ege & Stengos, Thanasis, 2020. "Detecting Convergence Clubs," Macroeconomic Dynamics, Cambridge University Press, vol. 24(3), pages 629-669, April.
    11. Paweł Gajewski, 2017. "Sources of Regional Inflation in Poland," Eastern European Economics, Taylor & Francis Journals, vol. 55(3), pages 261-276, May.
    12. Beylunioglu Fuat C. & Stengos Thanasis & Yazgan M. Ege, 2017. "Detecting capital market convergence clubs," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(3), pages 1-14, June.
    13. DO ANGO, Simplicio & AMBA OYON, Claude Marius, 2016. "A PANIC Attack on Inflation and Unemployment in Africa: Analysis of Persistence and Convergence," MPRA Paper 79685, University Library of Munich, Germany.

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