The Impact of Uncertainties on Inflation Using Time-Varying Causality Approach: Evidence from Türkiye

This paper investigates the causal relationship from uncertainties to inflation in the case of Türkiye. To that end, we first apply the constant parameter Granger causality test. Later, considering the fact that estimated coefficients can change under the presence of structural breaks, we also conduct the time-varying Granger causality analysis which allows the coefficients to differ over time. According to the results drawn from time-varying causality analysis, uncertainties in the Turkish economy have predictive powers on inflation. This result is resistant to the different selection of window sizes and employed constant or time-varying causality tests. The causal channel from uncertainties to inflation coincides with the time periods when uncertainties are at relatively lower or higher levels. Finally, inflation itself can be a source of uncertainties in the Turkish economy. The causality from inflation to uncertainties appears when severe inflation shocks occur.