THE NEW KEYNESIAN PHILLIPS CURVE: IN SEARCH OF IMPROVEMENTS FOR ADAPTATION TO THE TURKISH ECONOMY

Abstract

This paper provides a survey of the vast literature on the New Keynesian Phillips Curve (NKPC) by attempting to give a complete picture of the many disagreements surrounding the NKPC from both a theoretical and an empirical perspective. A few NKPC studies that are applied to Turkish data provide mixed evidence on the validity of this curve for the Turkish economy. The NKPC models employed in the Turkish literature do not account for one or more key structural features of the Turkish economy and thereby give rise to the reported conflicting results. These studies employ different modeling approaches especially when open economy factors are introduced. The NKPC model for the Turkish economy should combine imported intermediate goods with incomplete exchange rate pass through in import prices. The incomplete pass through assumption allows one to model import pricing decisions and the inclusion of imported intermediate inputs to the production function reflects an empirical regularity for the Turkish economy. In Turkey most of goods imported by Turkey are at the intermediate level and constitute a large fraction of the costs of the industry.