Inflation Dynamics in Turkey: In Pursuit of a Domestic Cost Measure

Abstract

We provide Bayesian estimates of an empirical model of consumer price inflation for Turkey based on the hybrid new Keynesian Phillips curve. We decompose real marginal costs into domestic and foreign components and focus particularly on identifying the effect of the domestic component. We find that the baseline model that uses output gap as a measure of domestic real marginal costs does a better job in explaining consumer price inflation compared to alternative models that incorporate real unit labor costs. However, estimations for services inflation point to the importance of real unit labor costs for this sector.

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