The Origins and Dynamics of Inflation in Turkey: An SVAR Approach

Abstract

This study aims to present empirical evidence on the relative importance of supply and demand-side factors in determining the fluctuations in the general level of prices in the Turkish economy. The employed strategy uses the view that supply and demand pressures can be distinguished from each other depending on the direction of their effects on price and quantity. After classifying the related economic variables as supply, demand, and common factors, the main determinants of domestic supply and demand were estimated econometrically using sample data from 2003:1–2021:4, and their relative contribution to inflation was calculated. By using these basic determinants, the estimated structural vector autoregressive (SVAR) model shows that the pressures arising from the supply side are more dominant than the pressures of the demand side on the inflationary process in Turkey. The results indicate that the methodology suggested in this study will be useful in separating the factors that contribute to inflation, which has recently gotten out of control in Turkey and is gradually moving away from the targeted inflation. Policymakers considering these findings can reach optimal decisions in conducting the monetary policy toward the targeted level of inflation.