The effects of the inflanationary expectations formation process on inflation and the concequences on the disinflation programs

The aim of this study is to determine the weights of the adaptive andrational elements of the expectation formation process in Turkey and todiscuss whether a costless disinflation may be possible for the Turkisheconomy in the context of the literature on the effects of nature of expectationformation process on the cost of disinflation.According to the economic literature the expectations may be formedadaptively and/or rationally. In reality, the expectation formation contains bothadaptive and rational elements and the weights of the adaptive and rationalelements of the expectation formation may differ in every economy. Theseweights have a deterministic effect on the costs of disinflation process. Inliterature, these costs are measured by calculating the change in the outputor unemployment following a one percent fall in inflation and called as the?sacrifice ratio?. Minimizing the sacrifice ratio for an economy is a matter offormation of the expectations independent from the past elements and bytaking into account all of the relevant information available in a forwardlooking sense, implying that as rational as possible. The literature states thatin a case where the weight of the forward looking component of theexpectations is more than 50%, a costless disinflation process is possible.Our empirical study showed that the weight of the forward lookingcomponent of Turkish economic agents? inflationary expectations formation is37%. So, the Turkish economic agents do not only consider the pastexperiences, but also behave rationally. On the other hand, the rationalcomponent of expectations formation of the Turkish economic agents isbelow 50%, meaning a lower percentage than the necessary condition of acostless disinflation process. This means that in Turkey a disinflation processwill have some short term costs. In sake of the success of the disinflationpolicies, the expectations of the public should be managed and the stickinessrelated with the past inflation experiences should be abolished.