SYSTEMATIC AND SPECIFIC COMPONETS OF INFLATION AND INFLATION UNCERTAINTY: EVIDENCE FROM TURKEY

Ercan BALABAN ( Johann Wolfgang Goethe University)

This paper is a pioneering effort to decompose both inflation and inflation uncertainty into systematic and unsystematic components using data from a country with high and chronic infation, namely Turkey. We employ Consumer Price Index (CPI) and its fifty sub-indices for the period January 1988 to December 1998. First, time series regressions are run to measure the CPI-sensitivity of each sub-index. Using these estimated sensitivity measures, systematic and unsystematic components of each sub-index inflation and inflation uncertainty are quantified. We conclude that time series behavior of inflation and inflation volatility differs across the sub-indices, and in turn, using only total inflation uncertainty may not be enough. Second, a cross-sectional regression is run to test whether the sensitivity measures can explain inflation. In addition, symmetric and asymmetric error statistics are also calculated. Finally, implications for inflation targeting using a core inflation measure are discussed.