Inflation Targeting and Convergence within Turkey

HAKAN YILMAZKUDAY, VANDERBILT UNIVERSITY

Abstract

Using a disaggregated level CPI data set, this paper compares the bilateral convergence properties of Turkish regional inflation rates between the pre-inflation-targeting and inflation-targeting periods. Rather than using an ad hoc date for the introduction of the inflation-targeting regime, the structural break dates are estimated for Turkish national inflation rate as well as the standard deviation of the Turkish regional inflation rates. It is found that the first moment of Turkish national inflation had a break right after the beginning of the explicit inflation-targeting regime in January 2002, and the second moment of Turkish regional inflations had a break right before the financial crisis in February 2001 after which Turkey adopted a flexible exchange rate. It is found that during the inflation-targeting period, the Turkish regional inflation rates have converged to each other in terms of CPI groups with relatively non-tradable components, and they have diverged from each other in terms of CPI groups with relatively tradable components.