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Inflation Dynamics and Business Cycles

  • Suleyman Hilmi Kal

    ()

  • Nuran Arslaner

    ()

  • Ferhat Arslaner

    ()

This paper aims to investigate whether the effect of inflation expectations, exchange rate, money supply, industrial production and import prices on inflation depends on business cycle. For this purpose, a two states Markov Switching Auto Regression model with time varying transition probabilities to a generic inflation model is implemented for the period 2003-2013. In the model the states are assigned whether output gap is positive or negative. The inflation forecasting in-sample and out-of-sample is also utilized by adopting mean squared error and Diebold Mariano test to measure explanatory and forecasting power of our model. Our main finding provides that the determinants of inflation have different dynamics during boom periods as compared to recessions.

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Paper provided by Research and Business Development Department, Borsa Istanbul in its series Working Paper with number 19.

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Date of creation: Mar 2014
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Handle: RePEc:bor:wpaper:1419
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