Navigating Resilient Inflation: Monetary Policy Responses And The Macroeconomic Determinants of Persistence In Turkey

Abstract

The confluence of factors such as the emergence of inflationary pressures, the structural persistence of inflation dynamics, sensitivity to implemented policies, and the impact of both domestic and external shocks, contributes to the chronic nature of inflation. Inflation persistence can be defined as the continuation of inflation in response to shocks, notwithstanding policy interventions. In this context, the theoretical framework of the study is grounded in the tenets of the Monetarist and New Keynesian schools of thought. This study empirically investigates the determinants of inflation persistence within the Turkish economy, covering the period from 2005Q1 to 2023Q4.  Consequently, the analytical model incorporates the following variables: the inflation rate, broad money supply (M2), the policy interest rate, the nominal exchange rate, and the output gap. The stationarity of the variables employed in the study was assessed using the ADF unit root test. The presence of a long-run cointegrating relationship was examined via the ARDL bounds test, and causality was investigated using the Toda-Yamamoto test. The findings derived from the empirical analysis indicate that the nominal exchange rate exerts the most significant long-run impact on inflation. This is followed, in order of magnitude, by the output gap and the policy interest rate. The results suggest that among the factors shaping and determining inflation in the Turkish economy, demand-side pressures and exchange rate pass-through effects are robust, whereas policy credibility appears to be weak. In this regard, the study underscores the necessity for policymakers to acknowledge and address the strengthening of the monetary policy transmission mechanism, which would aid in mitigating the structural impacts of chronic inflation.