Inflation Targeting and Convergence within Turkey

HAKAN YILMAZKUDAY, VANDERBILT UNIVERSITY

Abstract

There is a large body of evidence of the convergence of inflation rates among the countries under a common monetary policy and currency. This paper shows that even the convergence of inflation rates among the regions of a country is questionable. Then, a natural question to ask is, “What is the role of monetary policy in regional inflation convergence within a country?” The answer emerges from the investigation of this paper comparing the convergence properties of the inflation rates among the regions of Turkey, between the pre-inflation-targeting and inflation-targeting periods. By using a structural break analysis, it is found that the first moment of national inflation had a break, right after the beginning of the explicit inflation-targeting regime in January 2002, and the second moment of regional inflations had a break, right before the financial crisis in February 2001 after which Turkey adopted a flexible exchange rate. The obtained break dates are used to compare the convergence properties of regional inflation rates of Turkey in the pre-targeting and targeting periods. While there is no evidence of a convergence process in the pre-targeting period, there is evidence of absolute convergence among the bilateral pairs of regions in the targeting period.