The evaluation of the relationship between inflation and unemployment: Example of Turkey (1988-2021)

This study aims to analyze the relationship between unemployment and inflation in Turkey during the period of 1988-2021. In the study, annual data obtained from the World Bank was used to examine the variables of inflation (ENF) and unemployment (UNEMPLOYMENT). Unit root tests (ADF, PP, DF-GLS, KPSS) were applied to determine whether the series are stationary or not. According to the unit root test results, the LNENF and LNUNEMPLOYMENT series have a unit root at the level, indicating that they are not stationary. However, they become stationary when the first difference is used. Since the hypothesis of a unit root presence was rejected by ADF, PP, and DF-GLS tests, it can be said that the series are stationary. The KPSS test confirms that the series are stationary. Then, the long-term relationship was examined using the autoregressive distributed lag (ARDL) modeling approach, which is a cointegration test. According to the results obtained using the ARDL(1,0) model, the LNENF variable shows a positive relationship with previous periods' inflation. However, the LNUNEMPLOYMENT variable does not show a statistically significant relationship. Additionally, tests such as serial correlation, heteroscedasticity, and normal distribution of residuals were conducted. It was concluded that there is no serial correlation or changing variance, and the residuals are normally distributed. Finally, a reset test was conducted to check for model misspecification. The results obtained indicate that there is no model misspecification. Based on these findings, it can be said that during the analyzed period in this study inflation is caused by unemployment.