The causal linkage between inflation and inflation uncertainty under structural breaks: Evidence from Turkey

Abstract

The goal of this paper is to examine the relationship between inflation and inflation uncertainty for Turkey through monthly data spanning the period 2004:01-2019:12. To this 1 See Kara ( 2006) for the details of the implicit inflation targeting strategy in Turkey.

Is inflation uncertainty a self‐fulfilling prophecy in South Africa?

“…Overall, these findings are in line with the recent work of Apergis et al (2021), who, considering Turkey, found that there is no causality between inflation and inflation uncertainty when the main objective of the CBRT was to achieve price stability, whereas when the CBRT tried to achieve both price stability and financial stability (and when the inflation was more heightened and volatile), the Friedman–Ball hypothesis held and rises in inflation led to increased inflation uncertainty.…”

“…To form a more comprehensive measure of uncertainty, Engle (1982), along with Bollerslev (1986), introduced a model recognised as the generalised autoregressive conditional heteroskedasticity (GARCH) model where the conditional variance of a one‐step‐ahead forecast error is utilised as a proxy of inflation uncertainty, and these GARCH models allow for deviations in the conditional variance to persist over time (Ajevskis, 2007). The use of GARCH modelling techniques became prevalent in the literature in testing the inflation–inflation uncertainty link (see Alimi, 2017; Apergis et al, 2021; Jiranyakul, 2020; Tas, 2012, among others), with studies employing different classes of GARCH models, including symmetric and asymmetric models—such as the exponential GARCH (EGARCH) introduced by Nelson (1991); the threshold GARCH (TGARCH) introduced by Zakoian (1994); the Asymmetric Power ARCH (APARCH) model of Ding et al (1993); and the Glosten, Jagannathan and Runkle GARCH (GJR‐GARCH) model—among others.…”

“…Included in the body of literature are studies by Grier and Perry (1998), Bhar and Hamori (2004), Balcilar and Ozdemir (2013) and Chowdhury and Sarkar (2015), who considered the Group of Seven (G7); Fountas (2001), Fountas et al (2004), Kontonikas (2004) and Lawton and Gallagher (2020), who focussed on European countries; Jiranyakul and Opiela (2011), Jiang (2016), Su et al (2017) and Jiranyakul (2020), who considered Asian economies; Asghar et al (2011) and Chowdhury (2014) for South Asia; and Daal et al (2005) and Barnett et al (2020), who looked at a subset of both developed and emerging economies—which allows the authors to investigate the inflation–inflation uncertainty nexus under different hypotheses, which include conventional vs unconventional monetary policy, explicit vs implicit inflation targets, independent vs dependent central banks and calm vs crisis periods. Looking at emerging economies, Nas and Perry (2000) and Apergis et al (2021) considered Turkey; Entezarkheir (2006), Nazar et al (2010) and Heidari et al (2013) investigated Iran; and Payne (2008) examined three Caribbean countries. Papers focusing on African countries—which have not procured much deliberation in the empirical literature—are studies by Achour and Trabelsi (2011) and Sharaf (2015), who looked at Egypt; Valdovinos and Gerling (2011), who focussed on eight affiliate countries of the West African Economic and Monetary Union (WAEMU) ; Hegerty (2012), who looked at nine SSA countries ; Barimah (2014), who examined Ghana; Bamanga et al (2016), who examined Nigeria; and Alimi (2017), who studied 44 African countries.…”