ABSTRACT
Abstract: Turkey is a country that has experienced high inflation but not hyperinflation over the past two decades; i.e., inflation has not reached large three-digit levels annually, but has remained around a figure which is, consistently, greater than 50% but has never gone beyond a 100% except for a couple of months in 1994. This observation implies that inflation in Turkey may have a highly persistent nature. The question is whether this persistence is due to the inflation rate having a unit root or whether it is stationary but exhibits long-memory. Thus, we first tested for the presence of additive outliers (AO) in the inflation rates and, having identified the statistically significant ones, we applied the ADF test with AO dummies included in the regression and the modified Phillips-Perron test, as suggested by Vogelsang (1999), since it is expected to be robust against AOs. The results of these first-stage investigations indicated that the presence or absence of a unit-root cannot be established unequivocally except for the CPIbased inflation rates where it was found to be present and the public-sector WPIbased inflation rates where it was found to be absent. Given this situation, we turned to investigating long-memory in the inflation series using ARFIMA models and obtained values for the fractional integration parameter between 0 and 0.5, indicating that the monthly inflation rate is essentially stationary but has, in general, a significant long memory component. These results indicate that the two recent, IMF-backed attempts by the government to reduce inflation have to deal with a process which, essentially, is stationary but has a strong long-memory component and will exhibit a great deal of resistance initially, but if the antiinflationary policy is successful, would yield long-lived results. 1
1. Introduction
Turkey is a high inflation country but, as opposed to other countries like Argentina, Brazil and Israel where periods of high inflation occurred, the inflation in Turkey has not turned into hyper-inflation; in other words, it has not reached large three-digit levels annually but has remained around a figure which is consistently greater than 50% but has never gone beyond
100% except for a couple of months in 1994. This observation implies that inflation in Turkey may have a highly persistent nature. The question is whether this persistence is due to the inflation rate being nonstationary, i.e., having a unit root, or whether it is stationary but exhibits long memory.
