Abstract
In this study we analyze the relationship between the Consumer Price Index (CPI) and the Producer Price Index (PPI) in Turkey. We test long run, short run and causality relationship of these series. Johansen’s cointegration tests present a long run relationship between these series. Vector error correction (VEC) model specification suggests these series move together. There is a unidirectional long run causality from CPI to PPI. On the other hand VEC Granger causality test indicates no causality in short run. Thus our results suggest demand pull inflation in long run.
Highlights
The change on consumer and producer prices is evaluated by price indices
On the other hand Vector error correction (VEC) Granger causality test indicates no causality in short run
When there is an increase for producer prices, raw materials is required for the production of intermediate goods which is needed for the production of final goods
Summary
The change on consumer and producer prices is evaluated by price indices. Definition of price indices according to Turkish Statistical Institute (Turkstat) is given as flow. The opposite causality can be observed between CPI and PPI, which is explained by demand pull effect. After 2001 crisis, the independence of the Central Bank was granted between 2002-2005 implicit inflation targeting policy was conducted During this period floating exchange rate regime increased, fiscal dominance weakened, and financial markets started to deepen and financial sector became less fragile. With the successful implementation of a mix of prudent monetary and fiscal policies, bank restructuring program and structural reforms, economic and financial stability were strengthened These developments contributed to credit expansion, mostly from the demand side, due to the remarkable fall in inflation and the associated reduction in nominal as well as real interest rates.
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