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Do Financial Conditions have a Predictive Power on Inflation in Turkey?

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  • Umit Bulut

    (Department of Economics, Faculty of Economics and Administrative Sciences, Ahi Evran University, Kirsehir 40100, Turkey)

Abstract

This paper aims at examining the causal relationships between financial conditions and inflation in Turkey by employing quarterly data from 2005:Q1 to 2015:Q3. To this end, the paper, first, constructs a financial conditions index (FCI) in Turkey and observes that the FCI can considerably capture the developments in Turkey and in the world. Then, the paper follows unit root tests. Finally, the paper conducts the asymmetric causality test. The asymmetric causality test explores that the FCI and inflation have a predictive power on each other and thus presents valuable information to the Central Bank of the Republic of Turkey (CBRT). Eventually, upon its findings, the paper asserts that the FCI: (i) Should be updated periodically, (ii) should be extended with new financial variables, if necessary, and (iii) should be monitored carefully by the CBRT in order to achieve inflation targets.

Suggested Citation

  • Umit Bulut, 2016. "Do Financial Conditions have a Predictive Power on Inflation in Turkey?," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 621-628.
    • Handle: RePEc:eco:journ1:2016-02-35
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    References listed on IDEAS

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    More about this item

    Keywords

    The Central Bank of the Republic of Turkey; Financial Conditions Index; Inflation; Asymmetric Causality Test;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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