Impact of Currency Redenomination on Inflation Case Study Turkey

Abstract

Countries that suffer from high inflation must consequently deal with an unpractical, high price level. This problem lasts even if the country is already on the disinflation path. The solution can be found in redenomination when the face value of all prices is reduced. This raises an interesting question whether redenomination as such could help the disinflation process. Cutting zeros could help convince market subjects that the central bank means its disinflation efforts seriously. In the specific, the goal of this paper is to find out if Turkish redenomination in 2005 contributed to the disinflation process. We used the Chow test and Vector–Autoregressive model to detect if redenomination created a fracture in inflation development. We indeed discovered a fracture, but it is difficult to determine the exact occurrence of the break. We can conclude that the process of redenomination as such probably had a direct impact on inflation in the country.