Dynamics of Inflation in Turkey: Supply Shocks or Demand Shocks?

This study investigates whether supply-side or demand-side shocks are the primary drivers of core inflation and inflation expectations in Turkey during the post-2013 period. To capture the evolving nature of inflation dynamics, the analysis employs a Time-Varying Parameter Vector Autoregression (TVP-VAR) model covering the period 2013-2024. In addition, the interdependence and transmission of shocks are examined within a connectedness framework, allowing for a comprehensive assessment of how different macroeconomic disturbances propagate through the inflation process. The empirical results provide robust evidence that demand shocks exert persistent and long-lasting effects on both core inflation and inflation expectations, whereas supply shocks generate comparatively short-lived and transitory impacts. The findings further reveal that the role of the credit transmission channel in shaping inflation dynamics has intensified in the post-pandemic period. Moreover, inflation expectations exhibit a growing degree of persistence, indicating that past expectations increasingly influence the formation of future expectations. By providing time-varying evidence on the relative importance of demand and supply shocks, this study contributes to the literature on inflation dynamics in emerging economies and offers new insights into the structural drivers of inflation in Turkey. The results highlight the dominant role of demand-side pressures in sustaining inflationary dynamics. Although these findings point to the relevance of conventional monetary tightening in restoring price stability, the effectiveness of such measures remains contested in the presence of institutional constraints and episodic shifts toward heterodox policy frameworks. In particular, the observed rigidity in inflation expectations suggests that reliance solely on monetary policy instruments - especially those operating through the credit channel - may be insufficient to anchor expectations and stabilize inflation. These results therefore underscore the importance of a comprehensive policy framework that integrates credible monetary tightening with sustained fiscal discipline and strengthened institutional credibility to achieve durable macroeconomic stability.