Hakan Yilmazkuday

Inflation, Financial Development and Growth: A Trilateral Analysis

A large body of evidence links financial development to economic growth, yet the channels through which inflation affects this relationship and its stability have been less thoroughly explored. We take an econometric and graphical approach to examining these channels, and find that higher levels of financial development, combined with low-inflation, are related to higher rates of economic growth, especially in lower income countries, but that financial development loses much of its explanatory power in the presence of high-inflation. In particular, small increases in the price level seem able to wipe out relatively large growth effects of financial deepening when the annual rate of inflation lies between 4% and 19%, whereas the operation of the finance-growth link is less affected by inflation rates above this range. Growth is generally much lower, however, in such high-inflation settings where financial development is typically repressed.

Monetary policy rules in practice: evidence from Turkey and Israel

Forward looking monetary policy rules are estimated for Israel and Turkey. When variable inflation targets are taken into consideration, as opposed to the fixed targets used in prior research that use data from developed countries, forward looking Taylor rules seem to provide reasonable description of Central Bank behaviour in both countries. In general, it can be said that monetary policy appears to be quite strong in these countries, and especially so in Turkey, when compared with developed countries.

Structural Breaks in Monetary Policy Rules: Evidence from Transition Countries

This paper investigates the relation between the important announced turning points in the monetary policies and the estimated structural break dates in the Taylor rules of three transition countries—the Czech Republic, Hungary, and Poland. Although the important announced turning points starting in the late 1990s, especially the introduction of an inflation-targeting regime, can be observed in the estimated Taylor rules of the Czech Republic and Poland with some implied lags due to the monetary transmission mechanism, the same conclusion cannot be reached for Hungary. Several robustness analyses are in support of these results.

Inflation targeting, flexible exchange rates and inflation convergence

Using a disaggregated level Consumer Price Index (CPI) data, this article compares convergence properties of regional inflation rates in a small open economy, Turkey, between pre-inflation-targeting and inflation-targeting periods, where the latter also corresponds to a flexible exchange rate regime. It is found that during the inflation-targeting period, Turkish regional inflation rates have converged to each other in terms of CPI groups with relatively nontradable components, while they have diverged from each other in terms of CPI groups with relatively tradable components. Since a common and sound monetary policy among the regions of a country is supposed to have a convergence effect on regional inflation rates according to the conventional wisdom, the results for CPI groups with relatively tradable components require further attention and have significant policy implications, especially for inflation-targeting countries using flexible exchange rate regimes.

Effects of Credit and Debit Cards on the Currency Demand

We analyze the effects of credit and debit cards on the currency in circulation by using GMM estimation. Instead of using the data obtained by surveys, we use monthly data obtained by an interbank institution that keeps the statistics of all credit and debit cards usage of a small open economy, Turkey, for the period over 2002M1–2006M10. As expected from the theory, we find that an increase in the usage of credit and debit cards leads to a decrease in the currency demand. Moreover, the usage of the debit cards has a bigger effect on the money demand, compared to the usage of the credit cards. We also find that the effect of credit cards is mostly through purchases and the effect of debit cards is mostly through withdrawals

Inflation targeting supported by managed exchange rate

We compare, on a welfare loss basis, possible inflation targeting regimes supported by different exchange rate rules. For model parametrization, we estimate a forward looking monetary policy rule for Trukey. When variable inflation targets are taken into consideration, as opposed to the fixed targets used in prior research that use data from developed countries, forward looking Taylor rules provide a reasonable description of Central Bank behaviour in Turkey. By applying a calibration based on estimated parameters, we compare the loss functions under flexible inflation targeting and strict inflation targeting while taking into consideration the supporting regimes, namely a flexible exchange rate and a managed floating exchange rate. We find that the welfare loss function caused by four simultaneous shocks, namely a foreign interest rate shock, a monetary policy shock, a foreign output shock and a domestic output shock, is minimized under the flexible inflation targeting regime supported by a managed floating exchange rate rule.

Inflation Thresholds and Growth

This paper investigates inflation thresholds that lead to higher growth rates using five-year averages of standard variables for 84 countries from 1965 to 2004. The historical experience has important policy implications for developing countries: (i) the catch-up effect has worked only when inflation is below 12%; (ii) the positive effect of human capital on growth has been present and significant when inflation has been below 15%; (iii) financial development has been effective only when inflation has been below 10%; (iv) government size has negatively affected growth when inflation has been below 10%; (v) trade has positively affected growth when inflation has been below 8%.

Constant versus Variable Markups: Implications for the Law of One Price

This paper compares the implications of having constant versus variable markups on the Law of One Price (LOP) by decomposing the good-category level prices into marginal costs of production, markups, and trade costs. Using a trade model, it is shown that the case of constant markups corresponds to log-linear trade regressions, while the case of variable markups corresponds to lin-log trade regressions. Empirical results show that marginal costs of production contribute most to the deviations from LOP for both cases of constant and variable markups; the decomposition of marginal costs further shows that destination-specific quality measures play the biggest role.

Pass-Through of Trade Costs to U.S. Import Prices

This paper measures the pass-through of trade costs into U.S. import prices by using actual data on duties/tariffs and freight-related costs. The key innovation is to decompose the indirect effects of trade costs (on prices) into the effects on markups, quality and productivity while measuring/interpreting the pass-through of trade costs into welfare. Robust to the consideration of variable versus constant markups, there is evidence for incomplete pass-through, mostly due to the negative indirect effects of trade costs on marginal costs, suggesting that lower trade costs are associated with imports that have higher marginal costs; markups are affected relatively less. When the effects of trade costs on marginal costs are further decomposed into their components, the positive contribution of quality dominates in all cases, followed by the negative effects of productivity, suggesting that lower trade costs are associated with higher-quality imports that have been produced with lower productivity.

Mismeasurement of Distance Effects: The Role of Internal Location of Production

The estimated effects of distance in empirical international trade regressions are unrealistically high. Using state-and-sector level US exports data, this paper shows analytically and proves empirically that ignoring the internal location of production (of international exports), which leads to the overestimation of distance effects by about twofold, is a possible explanation. This overestimation is mostly attributed to the mismeasurement of the distance elasticity of trade costs when internal locations of production are ignored. A corrective distance index is proposed to avoid such mismeasurements and is shown to work well for the median sector. The results are robust to the consideration of alternative estimation methodologies and data sets.