The Turkish Phillips Curve Experience and the New Keynesian Phillips Curve: A Conceptualization and Application of a Novel Measure for Marginal Costs

Abstract

This paper analyzes an application of a novel measure for marginal costs within the framework of the new Keynesian Phillips curve (NKPC) for Turkey. We show that the commonly used labor income share is a weak proxy variable for marginal costs in the Turkish economy and propose a marginal cost index to mitigate these shortcomings. Further, our results indicate that there exists no conventional and expectation-augmented Phillips curve in Turkey and that the output gap Phillips curve only provides an insubstantial depiction of Turkish inflation from 2005 to 2009. On the contrary, the conventional and hybrid NKPC are both found to be valid descriptions of the inflation process in Turkey.

Keywords: Phillips Curve, Inflation, New Keynesian, Aggregation, Consumer Price Index, CPI, Index Number, Production Index, Wholesale Price Index, Instrumental Variables, Informal Economy, Informal Sector, Underground Economy

JEL Classification: E31, E12, C43, C36, E26