Fethi Ogunc

Estimating the output gap for Turkey: an unobserved components approach

This study specifies a basic univariate and a bivariate unobserved components model to estimate potential output using information from observable aggregates and presents results for the Turkish economy. The first specification used in the study, i.e. univariate approach, decomposes actual output into potential output that follows a random walk with a time-varying potential growth rate and a stationary output gap. The univariate specifications commonly ignore some economic content, which might be relevant for the measurement of the output gap. In this respect, the univariate model is extended by utilizing the relationship between inflation and the output gap, namely the Phillips curve. Whereas both models give similar output gap estimates, signal extraction statistics suggest that incorporating the supply side to the system reduces the parameter uncertainty and the total standard error and improves the gap estimate.

Estimating the neutral real interest rate in an emerging market economy

This study estimates the neutral real interest rate and output gap jointly under two different multivariate unobserved components models. In the analyses, Kalman filter is applied to a small-scale macroeconomic model of the Turkish economy to estimate the unobserved variables for the period 1989 to 2005. In addition, two alternative specifications for neutral real interest rate are exploited in the analyses. The first model uses a simple random walk model for the neutral rate, whereas the second one employs more structural specification, which specifically links the neutral rate with the trend growth rate and the long-term course of the risk premium by adapting the model proposed by Laubach and Williams (2003) to allow for small open economy consideration. Model evaluations clearly indicate the use of more structural specification against random walk specification. Results point out that the variation in the long-term course of the risk premium could be an important determinant of the neutral real interest rate in Turkey. Though there is relatively high uncertainty surrounding the neutral rate estimates to use them directly in the policy-making process, estimates appear to be very useful for ex post monetary policy evaluations.

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.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.