Output gap and monetary policy strategies within the scope of the phillips curve: Turkey as example

Many factors or variables affecting price movements are monitored by policy makers in order to enhance the effectiveness of monetary policies. Among these, it is argued that the most fundamental factor in is the output gap, which characterizes the difference between the aggregate supply and aggregate demand of the economy. Especially central banks of many countries that implement inflation targeting are closely monitoring the output gap and use it as an indicator of future inflation forecasts. The New Keynesians argue that their newly developed New Keynesian Phillips curve equation is the output gap, which is characterized as the main source of inflation and the real marginal cost indicator together with forward-looking expectations. Fuhrer and Moore (1995) and Mankiw and Reis (2002) argue that in countries with high inflation experience, inflation cannot be determined with only forward-looking expectations and that retrospective anticipation of the Phillips curve equation should also be taken into account. Thus they revealed the theoretical foundations of the hybrid of the New Keynesian Phillips curve. As a matter of fact, the Central Bank of the Republic of Turkey, which is implementing an inflation targeting strategy, closely monitors output gap and the relation Between the level of real production and inflation with the aim of forward-looking inflation. By using the 2002:M01-2017:M04 period data of the Turkish economy and the univariate, deterministic trend, Hodrick Prescott and Beveridge Nelson methods for Analysis with the help of the Hybrid New Keynesian Phillips Curve equation, whether output gaps, obtained from structural SVAR analysis based on economic theory, have an effect on inflation and to determine the decisiveness of the output gap on the inflation-monetary policy are the main aims of this study. The analyses show that the output gaps obtained by all four methods have significant effects on inflation and the output gap should be taken into account in the monetary policy making processes.