A regional analysis of inflation dynamics in Turkey

Abstract

A hybrid new Keynesian Phillips curve is estimated with spatial interaction effects among the dependent and the independent variables using data of 67 provinces across Turkey over the period 1987-2001. In contrast to previous studies, backward-looking behavior appears to be more or equally important than forward looking behavior. Furthermore, when the impact of this behavior is split up into a direct effect on the own province and an indirect effect on neighboring provinces, which due to employing a spatial econometric approach is possible, we find significant evidence in favor of convergence. This is an important finding since it corroborates a process of regional integration of inflation rates across Turkey, which is a precondition in the accession process of Turkey to the European Union. © 2013 Springer-Verlag Berlin Heidelberg.