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Relative price variability and the Phillips Curve: evidence from Turkey

  • Christopher Martin
  • A. Nazif Çatik
  • A. Özlem Onder

Purpose – Using data from Turkey, this paper seeks to investigate whether relative price changes can help to explain the Phillips Curve relationship between inflation and output. Design/methodology/approach – Building on work by Ball and Mankiw, the paper includes measures of the variance and skews of relative price adjustment in an otherwise standard model of the Phillips Curve. It employs a bounds-testing approach based on an ARDL model to establish long-run relationships. It then uses error correction models to analyze short-run dynamics. Findings – No evidence was found for a long-run relationship between inflation and output. However, a long-run relationship is in fact found, once the variance and skew of relative price changes are included as regressors. The error correction model implies plausible short-term dynamics in this case. Originality/value – This paper combines two distinct literatures, on the Phillips Curve and on the distribution of relative price changes, showing that insights from the latter can be essential in constructing coherent models of the Philips Curve.

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Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 38 (2011)
Issue (Month): 5 (November)
Pages: 546-561

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Handle: RePEc:eme:jespps:v:38:y:2011:i:5:p:546-561
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  1. Jörg Döpke & Christian Pierdzioch, 2003. "Inflation and the Skewness of the Distribution of Relative Price Changes - Empirical Evidence for Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 223(2), pages 136-158.
  2. Holly, Sean, 1997. "Relative Price Dispersion and the Rate of Inflation: The Evidence from Japan," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 12, pages 206-226.
  3. Debelle, Guy & Lamont, Owen, 1997. "Relative Price Variability and Inflation: Evidence from U.S. Cities," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 132-52, February.
  4. Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers rdp9502, Reserve Bank of Australia.
  5. Özlem Önder, 2006. "The Stability Of The Turkish Phillips Curve And Alternative Regime Shifting Models," Working Papers 0602, Ege University, Department of Economics.
  6. A. Özlem Önder, 2004. "Forecasting Inflation in Emerging Markets by Using the Phillips Curve and Alternative Time Series Models," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 40(2), pages 71-82, March.
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