Monetary Pressures and Inflation Dynamics in Turkey: Evidence from P-Star Model
This paper uses the P-star model to explain inflation dynamics in Turkey. In P-star models, money plays an important role by determining the price gap, which is postulated to measure the pressure on prices in the economy. This pressure emerges when output is above the potential, interest rate is lower than the natural rate, or there exists some excess money in the economy. The estimation results with the Turkish data show that the price gap does indeed contain considerable information for explaining inflation dynamics. Moreover, the model selection criterion that compares the empirical performance of the P-star model with the New Classical Phillips curve relationship favors the P-star model over the Phillips curve relationship. We conclude that money is efficacious in predicting risk to price stability in Turkey
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