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00/7 Long memory in Turkish inflation rates

Haluk Erlat

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 is not hyper-inflation; in other words, it does not reach large three-digit levels annually, but remains around a figure which is, consistently, greater than fifty percent but never goes beyond a hundred percent 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.

Investigations of this nature have been undertaken for developed countries (Hassler and Wolter, 1995) plus high inflation countries like Argentina, Brazil and Israel (Baillie, Chung and Tieslau, 1996) plus developing countries (Baum, Barkoulas and Caglayan, 1999). The latter paper includes Turkey and investigates long-memory, via fractional integration, in CPI-based inflation using monthly series for the period 1971-1995. In our study, we depart from Baum et. al. by considering the 1987.01-2000.01 period for which the 1987-based series exist, thereby avoiding spurious jumps in the data due to splicing different series, and also by investigating WPI-based inflation for the 1987.01-2000.01 period.

We first tested (using a procedure due to Vogelsang (1999)) for the presence of additive outliers (AO) in the inflation ratios and, having identified the statistically significant ones, we applied the ADF test with AO dummies included in the regression (Franses and Haldrup, 1994) and the modified Phillips-Perron test (Ng and Perron, 2000) as suggested by Vogelsang, since it is expected to be robust against AOs. The results of these first-stage investigations indicate that the presence of a unit-root cannot be established unequivocally except for the public-sector WPI based inflation rates where it was found to be absent.

Given this situation, we turned to investigating long-memory in the inflation series using Autoregressive Fractionally Integrated Moving Average 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. This value is slightly below 0.30 for CPI and public WPI based inflation rates, and close to 0.50 for overall WPI and private sector WPI based inflation rates.

These results indicate that the recent, IMF-backed attempt by the government to reduce inflation has to deal with a process which, essentially, is not nonstationary but has a strong-long memory component and will exhibit a great deal of resistance initially, but if the anti-inflationary policy is successful, would yield long-lived results.


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