The relationship of inflation and output gap: The case of Turkey

In order to prevent inflation, it is necessary to look good theoretically and econometrically. For this reason, studies on the causes of inflation in the literature remain up-to-date. The aim of the study is to analyze the relationships between the inflation rate and the output gap in Turkey using quarterly data for the 2003:1-2021:4 period. In the application part, the dependent variable is inflation, the independent variables are real effective exchange rate, capacity utilization rate, unemployment rate, brent oil prices and output gap. Relationships between variables were analyzed with Delayed Distribution Autoregressive Model (ARDL) and Error Correction Model (ECM). According to the ARDL analysis results, it was determined that there is a statistically significant relationship between brent oil prices, output gap and real effective exchange rate variables in the long run. Capacity utilization rate and unemployment rate variables were found to be insignificant in the long run. According to the results of the ECM analysis, when the variables that affect inflation in the short run are examined, it is concluded that the three-term lagged value of inflation, the three-term lagged value of the output gap, the level of the real effective exchange rate, and the two-term lagged value of the unemployment rate, the effect of the one-term lagged value on inflation is statistically significant in the short run. Oil prices and capacity utilization rate were observed as variables that did not affect inflation in the short term. ECM analysis revealed that 0.02 of the short-term imbalance experienced in the ARDL model will disappear in each quarter and the model will stabilize in the long-term. The general findings obtained in the study revealed that the continued use of the output gap as an indicator should be followed closely in terms of inflation and monetary policies to be implemented for inflation. Keywords: Inflation Rate, Output Gap, ARDL, ECM