Inflation targeting in Turkey: Var analysis

ABSTRACTÖZÇİFTÇİ ÖzlemInflation Targeting in Turkey:VAR AnalysisGraduate ThesisAnkara-2007 The purpose of this study within the frame work of inflation targeting which is applied by the central bank is determine the dynamics which will use in reestablishing the currency. Therefore VAR analysis is executed which frequently used for the solve dynamic structure of the macroeconomic factors. Although, the VAR modeling disallow the economic priory restrictions to defination of the variables which will use in the model gathered with priory information of economic theory and other studies which received on this case. The variables of the model is the Consumer Price Index, Exchange Rate, Interest Rate, Money Supply, Imports Price Index and Industrial Production Index. VAR analysis based on monthly time series data for 1990:01-2007:06 period. In the study the stationarities of the variables is tested by Unit root test (ADF) and in order to reveal cause and result relations among variables, Granger Causality test is applied. After employing of VAR process for dynamic structure analysis; Variance Decomposition is applied for how much percentage of the total variance on forecast error variance of inflation is explained by the others. Impulse-Response Function is measured for responses of the inflation variable to another variable which received on one standart deviation shock, Consequently, the most effective variable on general price level is money supply however, second graded variable is exchange rate in short term, imports price (unit value) index in long term . Firstly, in response to an unexpected shock on the money supply inflation shows an increasing, after first eight months inflation returns to the steady-state. In response to an unexpected shock on the exchange rate, inflation make a response with decrease and its returns to the steady-state needs eleven months. However, the shock on the imports price (birim değer) index cause of increasing on inflation and needs ten months for stability. In such a case, it can say that money supply policy will be more effective in battle against inflation.Key Words1. VAR Analysis2. ADF Unit Root Tests3. Granger Causality Test4. Impulse-Response Funtions5. Variance Decomposition6. Inflatin Targeting