erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Long Memory in Turkish Inflation Rates

Haluk Erlat (METU)

Abstract

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 second 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 1987.01-2000.1 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 same period.

We first look for the presence of a second-unit root in the price indexes, using not only the standard ADF and Phillips-Perron tests, but also the DFGLS test (Elliot et. al. (1996)) which takes near integratedness into account, and the sequential ADF tests due to Banerjee et. al (1992) and Perron (1997), which take account of structural shifts in the deterministic. The results of these first-stage investigations indicate that the presence of a second-unit root cannot be, established unequivocally, especially when a significant structural shift is observed, particularly for the CPI, the overall WPI and private sector WPI. The public sector WPI appears to have no second unit root.

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 over 0.30 for CPI and private WPI based inflation rates. It is slightly below 0.30 for overall WPI-based inflation and quite close to zero for public WPI-based inflation. None of these series are appreciably affected by the presence of a significant structural shift in 1994, except for the public WPI-based inflation; its fractional integration parameter is estimated as 0.059 without a structural shift and is statistically insignificant but becomes 0.1491 and significant at the 10% level with structural shift.

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.

Economic Research Center
Middle East Technical University
06531 Ankara Turkey
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e-mail: metuerc@metu.edu.tr