Examination of the New Keynesian Phillips Curve in the perspective of Turkish economy

Following the augmentation of the Phillips curve, which stands out as the trade-off between unemployment and inflation rates, by taking the developments regarding the expectations into account, the curve is further augmented with the Keynesian terms and hence is called the New Keynesian Phillips Curve (NKPC). In the NKPC, labor costs, output gap and inflation expectations come into the force in terms of their effects on inflation. In this study, we aim at the examination of the NKPC and its hybrid versions with quarterly data for the Turkish economy between 2006Q1 and 2020Q2. In the models developed for this purpose, the unit labor costs are added to the models as a proxy for real marginal costs. Further variables include the inflation expectations for the future periods, the output gap and the backward looking inflation rates where the former takes the adaptive expectations into the account. The models; the standard and hybrid types of the NKPC, are also estimated with seasonally adjusted variables. The findings of the study show that the effects of output gap and past inflation expectations on inflation dynamics in Turkey are significant and as expected; the significant effects of unit labor costs cannot be avoided statistically, and the effects of future expectations of inflation have very minor effect though being statistically significant in contrast to the dominant impact of the past inflation rates. It is concluded that the standard NKPC is valid for Turkey and the hybrid NKPC can be accepted as being partially valid. In terms of expectations, the results differ than those expected by the new Keynesian Phillips Curve. The significant effects of the past path of past inflations on current inflation play a critical role in Turkey.