Abstract
This study aims to analyse Turkish economy for the 2000-2013 period with emphasis on inflation dynamics within the framework of New Keynesian Phillips Curve (NKPC). Price equations are estimated by GMM with output gap and growth of output explanatory variables. NKPC is further estimated against detrended marginal cost index and labor income share (and alternatively) employment expectations gap. A new marginal cost index series is constructed representing manufacturing costs in Turkey. NKPC estimations reveal price dynamics is responsive to rate of increase of output rather than its level, revealing hysteresis patterns. The marginal cost index is significant with a small coefficient, whereas the backward looking labor income share is highly explanatory, accounting almost for one third of inflation dynamics.
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