Policy recommendation of the phillips curve and the asymmetric effects: Evidence from Turkey

Phillips curve which mentions the trade-off between the change in nominal wage rate and unemployment rate has been one of the most popular topics in economic literature and drawn the attention of both economists and policy makers. Though, this trade-off relationship is known to be introduced by A. W. Phillips (1958), it has initially analyzed by I. Fisher (1926). The issue has drawn much more attention after the period dominated by the pioneering work of Keynes (1936) and shown a rapid theoretical progress after the contributions of the most prominent economists such as R. Lipsey (1960), M. Friedman (1968), and R. Lucas and L. Rapping (1969). E. S. Phelps has been awarded the Nobel Price in Economics due to his works on that area in 2006. It is quite clear that the topic of the Phillips curve is an improving area in the literature of empirical economics. Besides, the role of the Phillips curve during the implementation of the monetary policy is of great importance and continually being discussed in the literature.In the years following the leading analysis of Phillips (1958), the trade-off relationship is evaluated in different ways. The trade-off between unemployment or inflation rate and growth rate has been investigated. In the last decade, the mathematical form of the curve and significance of that form in terms of monetary policy have been discussed by a growing empirical literature. However, studies concerning the Turkish case are limited in number. By taking advantage of this motivation, the relationship between the inflation gap and output gap is investigated by adopting the Markov switching model and using monthly data between 1990:1 and 2008:5. According to the findings, the relationship between the variables is nonlinear and thus, monetary policy may give rise to asymmetric effects as far as the Turkish economy is concerned. The major contribution of this study is that regime probabilities are computed in the context of Markov switching model by following Chen (2006).