Investigation of Expected Inflation According to Adaptive Expectations Hypothesis Using Koyck Transformation: A Study on Türkiye

Abstract

Inflation expectations have been researched theoretically and practically for more than a century and continue to be a favorite research topic for economists even today. The validity of the Rational Expectations Hypothesis has not yet been proven by empirical research, and many studies show that it is invalid. This situation drew attention again to the validity of the Adaptive Expectations Hypothesis. In this study, inflation expectations for Türkiye in the 2013m6-2023m7 period, under the assumption of the Adaptive Expectations Hypothesis, were tested first by applying the Nerlove (1958) model and secondly by applying the Koyck transformation within the framework of the Friedman-Cagan model. As a result of the study, although evidence was found that the Adaptive Expectations Hypothesis is valid in Türkiye according to the Nerlove (1958) model, it was observed that there was a weak relationship between actual inflation and expected inflation. The second model was applied to avoid hesitation in accepting the hypothesis. With the Koyck transform model, it has been determined that individuals in Türkiye learn from past inflation values in forming inflation expectations. The speed of this learning is 77%. It was concluded that individuals form their inflation expectations by using 77% of current and past inflation data. The intended history includes the current period, the first and second lags. In terms of expectations, the effect of the third lag is zero.