Abstract:

In this study, the relationship between inflation and relative price variability was separately investigated on the basis of both expenditure and sub-region in Turkey, for the period of 2003-2014. For this purpose, first, inflation rate and relative price variability of each expenditure group and sub-region were calculated by using monthly consumer price index of 31 expenditure groups in 26 TR regions. Later, correlation analysis was performed to determine the direction and the degree of the relationship between the two variables. Later, the binary variables which were separately generated for each 26 regions and for 31 expenditure groups were subjected to Granger causality test, variance decomposition and impulse-response analysis within the framework of the vector autoregressive (VAR) model. The results of the analysis for expenditure groups have shown that there is usually a bi-directional or unidirectional causality from inflation to relative price variability. The results based on regional data have shown that the direction of the causality generally runs from relative price variability to inflation.

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