Openness and inflation: A sectoral based analysis of the Turkish economy

With globalization, the impact of trade openness on macroeconomic indicators has gained increasing importance in the economics literature. In particular, the effects of openness on inflation have come to the forefront, raising debates on whether it supports or undermines price stability. In the case of the Turkish economy, although several empirical studies have examined the potential effects of openness on inflation, these studies mostly treat the economy as a whole and often overlook sectoral heterogeneities. However, the impact of openness on inflation may vary depending on the production structure, import dependency, and export capacity of individual sectors. In this context, the main objective of this study is to investigate the long-term effects of openness on inflation at the subsectoral level of the Turkish manufacturing industry.The study employs annual data covering the period 2003–2023, with trade openness indicators defined as the ratios of exports to GDP, imports to GDP, and total trade volume to GDP. To represent GDP, value added at factor cost and gross output series are utilized, allowing the construction of six different measures of openness. In the analyses, the ARDL Bounds Testing approach is applied together with panel data estimation methods, namely the Common Correlated Effects (CCE) and Augmented Mean Group (AMG) estimators.The findings reveal that the impact of trade openness on inflation differs across sectors. While openness exerts a downward effect on inflation in sectors with high international competitiveness, low import dependency, and an export-oriented structure, it has been found to exert inflationary effects in sectors that are more dependent on imports and technology. On the other hand, analyses conducted with aggregated data indicate that openness does not have a significant long-term effect on inflation, highlighting the importance of the aggregation problem in the manufacturing industry. Indeed, the sector-specific effects operating in opposite directions tend to offset each other within macro-level averages, thereby producing neutral results that do not reflect the actual dynamics. This situation suggests that the aggregation problem may lead to misleading conclusions in policy analyses and underscores the necessity of accounting for sectoral heterogeneity.