Abstract
This paper tries to examine the long run relationships between the aggregate consumer prices and some cost-based components for the Turkish economy. Based on a simple economic model of the macro-scaled price formation, multivariate cointegration techniques have been applied to test whether the real data support the a priori model construction. The results reveal that all of the factors, related to the price determination, have a positive impact on the consumer prices as expected. We find that the most significant component contributing to the price setting is the nominal exchange rate depreciation. We also cannot reject the linear homogeneity of the sum of all the price data as to the domestic inflation. The paper concludes that the Turkish consumer prices have in fact a strong cost-push component that contributes to the aggregate pricing.
Highlights
Our contribution to the existing literature is to empirically examine the appropriateness of a cost-push model of the aggregate price-setting in the economy
In line with such a rank determination procedure, we find that both LR tests tend to approve the existence of one potential stationary relationship in the long-term variable space as a cointegration vector
We cannot reject the linear homogeneity of the sum of all the explanatory factors as to the domestic inflation
Summary
We tend to follow such papers as Gordon de Brouwer and Neil R. We have included the domestic producer prices (Pws) as an explaining factor of the consumer prices, since they are able to represent the course of the prices of inputs, such as intermediate goods and energy, determined in the earlier stages of the production of goods. Following De Brouwer and Ericsson (1995), under the hypothesis of unit homogeneity in all prices, linear homogeneity allows us to re-write Eq 2 as follows: ln(μt This formulation, if it can be supported by the actual data, enables researchers to link the real prices of the various markets in the economy such as labor, foreign goods and input markets.. This formulation, if it can be supported by the actual data, enables researchers to link the real prices of the various markets in the economy such as labor, foreign goods and input markets. In our paper, we try to empirically test these relationships within a long-term perspective by applying to some contemporaneous time series estimation techniques
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