Inflation Expectations in Turkey: Determinants and Roles in Missing Inflation Targets

Bulu , Umi A icle In la ion Expec a ions in Tu key: De e minan s and Roles in Missing In la ion Ta ge s Jou nal o Cen al Banking Theo y and P ac ice P o ided in Coope a ion wi h: Cen al Bank o Mon eneg o, Podgo ica Sugges ed Ci a ion: Bulu , Umi (2018) : In la ion Expec a ions in Tu key: De e minan s and Roles in Missing In la ion Ta ge s, Jou nal o Cen al Banking Theo y and P ac ice, ISSN 2336-9205, De G uy e Open, Wa saw, Vol. 7, Iss. 3, pp. 73-90, h ps://doi.o g/10.2478/jcb p-2018-0024 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/217656 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by-nc-nd/4.0/ 73 In la ion Expec a ions in Tu key: De e minan s and Roles in Missing In la ion Ta ge s Umi Bulu * In la ion Expec a ions in Tu key: De e minan s and Roles in Missing In la ion Ta ge s Abs ac : This pape aims a speci ying he de e minan s o 12-mon h ahead and 24-mon h ahead in la ion expec a ions in Tu - key by using mon hly da a om Ap il 2006 o Decembe 2016. Pu di e en ly, his pape ies o shed ligh on how in la ion expec a- ions espond o changes in pas in la ion a e, in la ion a ge , ou - pu gap, USD/TL exchange a e, oil p ice, and EMBI in Tu key. To his end, he pape i s conduc s uni oo es s in o de o de ec he o de o in eg a ion o he a iables. Then, he pape employs he au- o eg essi e dis ibu ed lag app oach o examine whe he he e is a coin eg a ion ela ionship among a iables and o es ima e long- un pa ame e s. Acco ding o he indings, 12-mon h ahead expec ed in- la ion a e is posi i ely ela ed o pas in la ion a e, in la ion a ge , ou pu gap, USD/TL exchange a e, and oil p ice and is nega i ely ela ed o EMBI. Besides, 24-mon h ahead expec ed in la ion a e is posi i ely ela ed o pas in la ion a e and USD/TL exchange a e and is nega i ely ela ed o in la ion a ge and EMBI. Upon i s ind- ings, he pape makes some in e ences abou he success o in la ion a ge ing s a egy in Tu key. Keywo ds: he Cen al Bank o he Republic o Tu key, in la ion a - ge ing, in la ion expec a ions, decision make s and expe s, au o e- g essi e dis ibu ed lag app oach. JEL Codes: C22, E52, E58 * Ahi E an Uni e si y, Facul y o Economics and Adminis a i e Sciences, Depa men o Economics, Ki sehi , Tu key Email: ubulu @ahie an.edu. Jou nal o Cen al Banking Theo y and P ac ice, 2018, 3, pp. 73-90 Recei ed: 18 Oc obe 2017; accep ed: 29 Decembe 2017 UDK: 336.748.12(560) DOI: 10.2478/jcb p-2018-0024 74 Jou nal o Cen al Banking Theo y and P ac ice 1. In oduc ion A cen al bank which adop s a mone a y policy s a egy selec s a nominal ancho ha is publicly p esen ed (Lakic, Seho ic & D asko ic, 2016). In la ion a ge - ing is a mone a y policy s a egy ha uses in la ion expec a ion as he nominal ancho . A cen al bank which ollows in la ion a ge ing s a egy ies o achie e in la ion a ge using all a ailable in o ma ion and conduc s mone a y policy by s ee ing sho - e m (o e nigh ) in e es a es. Gi en he lagged e ec o mon- e a y policy on in la ion and he high co ela ion be ween in la ion expec a ions and in la ion (Bo inge , Reischle & Schach e , 2001; Meh a & He ing on, 2008; Mishkin, 2012; Tu gu opbas, 2017), a cen al bank ha adop s in la ion a ge - ing s a egy ies o a ec public’s in la ion expec a ion. When a cen al bank is anspa en , eliable, and epu able, i is able o shape public’s in la ion expec a- ion. Pu di e en ly, he expec a ion managemen o he cen al bank can ensu e ha he public’s in la ion expec a ion will be equal o in la ion a ge . This means he ancho ing o in la ion expec a ions. Hence, he cen al bank mus manage and ancho in la ion expec a ions o he success ul conduc o mone a y policy (Wong, 2015). The cen al bank, he e o e, adjus s sho - e m in e es a es so ha in la ion expec a ion is equal o in la ion a ge (see e.g., S ensson, 1997; Cla ida, Gali & Ge le , 1998, 1999, 2000). The Cen al Bank o he Republic o Tu key (CBRT) adop ed in la ion a ge ing in 2006. Like o he cen al banks ollowing in la ion a ge ing s a egy, he main pol- icy ins umen o he CBRT o achie e in la ion a ge s became sho - e m in e es a e and he CBRT ocused on expec ed in la ion a es as i was clea ly speci ied in he in la ion epo s o he CBRT. As a cen al bank adop ing in la ion a ge - ing s a egy, he CBRT announces no only i s own in la ion o ecas s bu also hose ob ained om he in la ion su - ey, which is ca ied ou by he CBRT. The su ey o expec a ions is conduc - ed in o de o ollow he expec a ions o he decision make s and expe s in inancial and eal sec o s ega ding mac oeconomic a iables. One o hese mac oeconomic a iables is in la ion. The e o e, one can ollow in la ion ex- pec a ions o he decision make s and expe s in Tu key h ough he su ey o in la ion expec a ions. G aph 1: In la ion and in la ion a ge s in Tu key (%) Sou ce: CBRT 75 In la ion Expec a ions in Tu key: De e minan s and Roles in Missing In la ion Ta ge s Using consume p ice index (CPI) da a, G aphs 1-3 depic he ac ual in la ion a es, in la ion a ge s, and in la ion expec a ions in Tu key. In la ion da a in G aphs 2-3 a e calcula ed on yea ly basis. As seen in G aph 1, he ac ual in la ion a es de ia ed conside ably om in la ion a ge s in 2006, 2007, 2008, 2011, 2012, 2013, 2014, 2015, and 2016. The ac ual in la ion a es we e lowe han in la ion a ge s only in 2009 and 2010 when he CBRT e ised in la ion a ge s upwa d. E en hough in la ion is also a ec ed by some o he ac o s along wi h mon- e a y policy and so cen al banks ha e impe ec con ol o e in la ion (S ensson, 1997), one can a gue ha he CBRT, which adop s in la ion a ge ing, is no suc- cess ul a achie ing in la ion a ge s. G aph 2 depic s ac ual in la ion a es and in la ion expec a ions du ing he pe iod 2006-2016. As seen, he in la ion a e luc ua ed a ound 8% du ing he pe iod 2006-2016 in Tu key. Hence, one can a gue ha in la ion is downwa dly s ic in Tu key. Expec ed in la ion a e o pe iod a -12 pe iod means 12-mon h ahead expec ed in la ion a e a -12 pe- iod. Simila ly, expec ed in la ion a e o pe iod a -24 pe iod means 24-mon h ahead expec ed in la ion a e a -24 pe iod. To keep i simple, hese da a migh be demons a ed. Fo ins ance, 24-mon h ahead expec ed in la ion a e was 4.82% in Ap il 2006 while 12-mon h ahead expec ed in la ion a e was 6.77% in Ap il 2007. Then, he ac ual in la ion a e was 9.66% in Ap il 2008. This g aph he e- o e e eals ac ual in la ion a es and in la ion expec a ions in Tu key and shows whe he he decision make s and expe s could o ecas u u e in la ion in Tu - key. As seen om he g aph, he ac ual in la ion a es we e usually highe han in la ion expec a ions in Tu key. Fo his eason, one migh a gue ha he deci- G aph 2: In la ion and in la ion expec a ions in Tu key (%) G aph 3: In la ion expec a ions and in la ion a ge s in Tu key (%) Sou ce: CBRT Sou ce: CBRT 76 Jou nal o Cen al Banking Theo y and P ac ice sion make s and expe s could no o ecas u u e in la ion in Tu key. Pu di e - en ly, he decision make s and expe s we e ex emely op imis ic abou u u e in la ion in Tu key. Ano he impo an inding indica ed in G aph 2 is ha o e- cas s inc eased o e ime since expec ed in la ion a e o pe iod a -12 pe iod was usually g ea e han expec ed in la ion a e o pe iod a -24 pe iod. Pu di e en ly, he decision make s and expe s could no o ecas u u e in la ion in Tu key hough hei le els o op imism dec eased and hey upwa dly e ised hei in la ion expec a ions o e ime. Simila ly, a ecen ly p oduced pape by Soybilgen and Yazgan (2017) inds ha o ecas pe o mances o he decision make s and expe s o in la ion a e e y poo by employing some econome ic me hods. G aph 3 p esen s expec ed in la ion a es and in la ion a ge s. As is depic ed in he g aph, in la ion expec a ions we e g ea e han in la ion a ge s in mos o he pe iods in Tu key. The e o e, one migh a gue ha in la ion expec a- ions we e no ancho ed well in Tu key. G aph 3 also shows ha 12-mon h ahead expec ed in la ion a e was g ea e han 24-mon h ahead expec ed in la ion a e. This e idence indica es ha he decision make s and expe s we e op imis ic e- ga ding in la ion in he ollowing pe iods. In sum, he indings exhibi ed in G aphs 1-3 a e ha (i) in la ion expec a ions we e no well ancho ed in Tu key, (iii) he decision make s and expe s we e no success ul in e ms o o ecas ing u u e in la ion, and (iii) he CBRT was no success ul in e ms o achie ing in la ion a ge s. As a ecen ly published pape by Bulu (2016) ema ks, long mone a y ansmission lags, dep ecia ion o he Tu kish Li a (TL), and inc eases in he p ices o ood and non-alcoholic be e - ages ha e oles in missing in la ion a ge s in Tu key. In addi ion o hese e en s, one o he easons o missing in la ion a ge s migh be ela ed o in la ion expec- a ions ha a e conside able o he success o mone a y policy. This is because in la ion expec a ions in Tu key a e usually low compa ed o ac ual in la ion a es and high as compa ed o in la ion a ge s. Then, some ques ions appea o be impo an o Tu key: wha de e mines and does no de e mine in la ion expec a ions in Tu key? Do decision make s and expe s in Tu key conside all a ailable and necessa y in o ma ion when o ming hei in la ion expec a ions? The answe s o hese ques ions help esea che s and policy make s o ind ou he easons o low in la ion expec a ions and a e e y conside able in e ms o success o he mone a y policy in Tu key. This pape ocuses on hese ques ions. In o he wo ds, his pape analyses he de e minan s o 12-mon h ahead and 24-mon h ahead in la ion expec a ions in Tu key by using mon hly da a om Ap il 2006 o Decembe 2016. How his pape con ibu es o he mone a y economics li e a u e lies in he ol- lowing h ee poin s: i) One can obse e ha he e is an ex ending empi ical li - 77 In la ion Expec a ions in Tu key: De e minan s and Roles in Missing In la ion Ta ge s e a u e on he de e minan s o in la ion expec a ions (see e.g., Meh a & He - ing on, 2008; Ge lach, Ho dahl & Moessne , 2011; Celasun, Mihe & Ra no ski, 2012; Coibion & Go odhichenko, 2015; Wong, 2015). The e o e, one may a gue ha his opic is wo h examining. ii) To he bes o he au ho ’s knowledge, he e a e a ew pape s examining he de e minan s o in la ion expec a ions in Tu key (see e.g., Baskaya, Ka a & Mu lue , 2008; Baskaya, Gulsen & O ak, 2010, 2012). These pape s employ simila models o ind ou he de e minan s o in la ion expec a ions and yield compa able indings. Acco dingly, hey examine whe he in la ion expec a ions a e ela ed o pas in la ion a e, in la ion a ge , exchange a es, oil p ices, embi+Tu key (EMBI), and indus ial p oduc ion gap. While all a iables ha e s a is ically signi ican and posi i e impac s on in la ion expec a- ions in he pape s o Baskaya e al. (2008, 2010), all a iables, excep EMBI and indus ial p oduc ion gap, ha e s a is ically signi ican and posi i e e ec s on in- la ion expec a ions in he pape o Baskaya e al. (2012). The e o e, he e seems o be a esea ch gap o Tu key in his ega d. iii) Baskaya e al. (2008, 2010, 2012) es ima e he coe icien s o independen a iables h ough o dina y leas squa es (OLS) wi hou examining a iables’ ime-se ies p ope ies, such as uni oo and coin eg a ion. Pu di e en ly, hey igno e he o de o in eg a ion o a iables. Howe e , esea che s should examine s a iona i y o a iables in o de o a oid spu ious eg ession p oblem in ime se ies analyses. Hence his pape , ins ead o employing OLS, conduc s uni oo and coin eg a ion es s o es ima e he e- sponses o in la ion expec a ions o changes in some mac oeconomic a iables. The es o he pape is o ganized as ollows: The ollowing sec ion p esen s mod- el and da a. Sec ion 3 gi es es ima ion me hodology. Findings a e epo ed in Sec ion 4. Sec ion 5 concludes he pape wi h a summa y o main indings and some implica ions. 2. Model and da a This pape pe o ms ime se ies analysis o speci y he de e minan s o in la ion expec a ions in Tu key. The s udy uses 12-mon h ahead and 24-mon h ahead an- nual CPI in la ion expec a ions. The da a a e mon hly and co e he pe iod om Ap il 2006 o Decembe 2016 since he CBRT has announced 24-mon h ahead in la ion expec a ions since Ap il 2006. Following Baskaya e al. (2008, 2010, 2012), his pape es ablishes he ollowing empi ical model: (1) 78 Jou nal o Cen al Banking Theo y and P ac ice k = 12, 24 whe e - 12/24-mon h ahead expec ed annual in la ion a e a pe iod, - in la ion a e a he p e ious pe iod, - 12/24-mon h ahead annual in la ion a ge a pe iod, - indus ial p oduc ion index gap (%) a -2 pe iod, - TL pe uni o US Dolla a pe iod (di ec quo a ion, USD/TL), - oil p ice (Eu ope B en Spo P ice FOB (Dolla s pe Ba el)) a pe iod, - embi+Tu key a pe iod, - e o e m. The model includes pas in la ion a e as public closely ollows pas in la ion a es (Baskaya e al., 2010). In la ion a ge is included in he model in acco dance wi h he essence o in la ion a ge ing s a egy as i was deno ed in he i s sec ion. In- la ion a ge s in in e im pe iods a e calcula ed h ough he linea in e pola ion me hod. The model also includes ou pu gap de ined as he di e ence be ween seasonally adjus ed indus ial p oduc ion index (2010=100) and po en ial indus- ial p oduc ion index and calcula ed h ough he il e de eloped by Hod ick and P esco (1997). Because, ou pu gap wa ns cen al banks and public abou in la iona y p essu es and hey can use ou pu gap o o ecas u u e in la ion (Ka a, Ogunc, Ozlale & Sa ikaya, 2007; CBRT, 2011). Two-pe iod lagged alue o ou pu gap is added o he empi ical model as indus ial p oduc ion index da a a e announced in abou wo mon hs in Tu key. The exchange a e channel is one o he mos conside able mone a y ansmission channels and indica es he e - ec s o changes in exchange a es on agg ega e demand and in la ion (K usko ic, 2017). Besides, a conside able pa o Tu key’s impo s a e p iced in USD. The model he e o e con ains TL pe uni o US Dolla . Hence, an inc ease in USD in- dica es dep ecia ion o TL. he The model in ol es oil p ices since oil is a consid- e able inpu o economic ac i i ies and changes in oil p ices can a ec in la ion in Tu key (Be umen & Tasci, 2002; Ca ik & Onde , 2011). Finally, embi+Tu key (Eme ging Ma ke s Bond Index Plus, EMBI) is included in he empi ical model o obse e he e ec s o mac oeconomic agili y on in la ion expec a ions in Tu key (Baskaya e al., 2010). All a iables’ coe icien s a e expec ed o be s a is i- cally signi ican and posi i e. While in la ion, in la ion expec a ions, in la ion a ge , indus ial p oduc ion index, and USD/TL da a a e ob ained om he CBRT, da a o oil p ices a e ex- 79 In la ion Expec a ions in Tu key: De e minan s and Roles in Missing In la ion Ta ge s ac ed om US Ene gy In o ma ion Adminis a ion (EIA). Besides, EMBI da a a e aken om JP Mo gan h ough Da as eam. 3. Es ima ion me hodology 3.1. Uni oo es s Speci ying he o de o in eg a ion o a iables is he i s s ep in ime se ies anal- yses o a oid spu ious eg ession p oblem. Uni oo es s p oduced by Dickey and Fulle (1981, hence o h ADF) and by Phillips and Pe on (1988, hence o h PP) a e commonly pe o med in econome ic analyses. Howe e hese es s do no conside possible b eaks in se ies and his is a p incipal sho coming o hese es s. Resea che s he e o e should ega d he possibili y o b eaks in se ies o ob ain e icien ou pu . Na ayan and Popp (2010) de elop a uni oo es wi h wo s uc u al b eaks ha a e endogenously de e mined. They sugges wo models allowing o wo s uc- u al b eaks. The i s model, namely M1, allows o wo s uc u al b eaks in in e cep while he second model, namely M2, allows o wo s uc u al b eaks in in e cep as well as end. The da a-gene a ing p ocess o a ime se ies y =d +u ha Na ayan and Popp (2010) desc ibe has wo componen s, a de e minis ic componen (d ) and a s o- chas ic componen (u ) whe e u p esen s an AR (1) p ocess. Models a e demon- s a ed as ollows: (2) (3) whe e He e, , i=1,2 s ands o he ue b eak da es. The pa ame e s θi and γi deno e he magni ude o he in e cep and end b eaks, espec i ely. Na ayan and Popp (2010) exp ess ha he inclusion o Ψ*(L) allows b eaks o happen slowly o e ime. The e o e, he p oposed model is an inno a i e ou lie class o models as i is based on he idea ha he se ies esponds o shocks o he end unc ion in a simila way as i esponds o shocks o he inno a ion p ocess, e . 80 Jou nal o Cen al Banking Theo y and P ac ice The es eg essions a e he educed o ms o he co esponding s uc u al model. They a e showed as (4) (5) The b eak da es a e de e mined using a sequen ial p ocedu e (see Na ayan & Popp (2010) o he de ails o his p ocedu e). The null hypo hesis o a uni oo o ρ=1 is es ed agains he al e na i e hypo hesis o ρ<1, and -s a is ics o in (4) and (5) a e used. C i ical alues a e gene a ed h ough Mon e Ca lo simula ions and depic ed in Table 3 in Na ayan and Popp (2010). I calcula ed es s a is ics a e g ea e han c i ical alues, he null hypo hesis o a uni oo is ejec ed. 3.2. Coin eg a ion es In a ime se ies analysis, i one de e mines he se ies a e no s a iona y, he/ she mus employ coin eg a ion me hods o examine he long- un ela ionships among se ies in o de o a oid spu ious eg ession p oblem. I he o de o in e- g a ion o se ies is di e en , he long- un ela ionship among se ies mus be in- es iga ed h ough he bounds es and he au o eg essi e dis ibu ed lag (ARDL) app oach. The main ad an age o he ARDL me hod is ha i can be employed i espec i e o whe he eg esso s a e pu ely I(0), pu ely I(1) o mu ually coin e- g a ed (Pesa an & Shin, 1999). Ano he g ea ad an age o he ARDL me hod is ha i can p esen e ec i e es ima ions in small samples (Na ayan and Na ayan, 2004). Acco dingly, i s , whe he he e is a coin eg a ion ela ionship among se- ies is examined h ough he bounds es ing app oach p oduced by Pesa an, Shin and Smi h (2001), and second, i his ela ionship exis s, sho - un and long- un pa ame e s a e es ima ed h ough he ARDL me hod p opounded by Pesa an and Shin (1999). Fo an empi ical model in which Y is dependen and X is independen a iables, he models ha a e es ablished o es whe he he e is a coin eg a ion ela ion- ship be ween a iables a e as ollows: (6) 87 In la ion Expec a ions in Tu key: De e minan s and Roles in Missing In la ion Ta ge s me hod. Acco ding o he indings, 12-mon h ahead expec ed in la ion a e is posi i ely ela ed o pas in la ion a e, in la ion a ge , ou pu gap, USD/TL ex- change a e, and oil p ice and is nega i ely ela ed o EMBI. Besides, 24-mon h ahead expec ed in la ion a e is posi i ely ela ed o pas in la ion a e and USD/ TL exchange a e and is nega i ely ela ed o in la ion a ge and EMBI. These indings ha e conside able implica ions. Fi s , mo e a iables ha e s a is- ically signi ican and posi i e impac s on 12-mon h ahead expec ed in la ion a e compa ed o 24-mon h ahead expec ed in la ion a e. These indings sup- po G aph 3 which p esen s 12-mon h ahead in la ion expec a ions we e g ea e han 24-mon h ahead in la ion expec a ions. Besides, he coe icien o in la ion a ge is nega i e in he second model. This is a se ious p oblem o he success o mone a y policy in Tu key ha essen ially aims a shaping in la ion expec a- ions o he decision make s and expe s o achie e in la ion a ge s. Second, all independen a iables in he models can a ec u u e in la ion and so should be conside ed by he decision make s and expe s while hey a e o ming hei in la- ion expec a ions. Thus in la ion expec a ions o he decision make s and expe s can ise i hey conside all a iables.2 Thi d, he CBRT may inc ease in e es a es and achie e in la ion a ge as a esul o mo e p ecise in la ion o ecas s in he su eys. O he wise, he CBRT may ha e o inc ease in la ion a ge s in he ollowing yea s in o de o achie e in la ion a ge s. 2 Acco ding o Soybilgen and Yazgan (2017), he cu en su ey can be econside ed by he CBRT o imp o e o ecas p ecision o he su ey. 88 Jou nal o Cen al Banking Theo y and P ac ice Re e ences 1. Baskaya, S., Ka a, H. & Mu lue , D. (2008). Expec a ions, Communica ion and Mone a y Policy in Tu key. Cen al Bank o he Republic o Tu key, Wo king Pape 2008/1. 2. Baskaya, Y.S., Gulsen, E. & O ak, M. (2010).In la ion Expec a ions be o e and a e he Ta ge Re ision in 2008 (in Tu kish). Cen al Bank o he Republic o Tu key, Wo king Pape 2010/1. 3. Baskaya, Y.S., Gulsen, E. & Ka a, A.H. (2012). 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