Abstract
We contribute to the debate on the linkage between inflation regimes and globalization in several respects. First, we analyze consumer goods and services classified with respect to their tradability and content of intermediate imports. Second, we use 4-digit commodity-based price index data and the official weights of items in the consumer basket in computations. Third, we explore which states of the reference indicators are more related to low, normal or high regimes of inflation. Regimes are determined using Markov regime-switching models. Probability score analysis compares the best matching of different regimes of inflation and reference indicators. Fourth, since we use commodity-based data we perform the analysis for an emerging country, Turkey, which has not only high trade openness and high global integration rate but also implements inflation targeting regime. Findings suggest that relevance of the reference indicators for predicting inflation depends on: the share of tradable items in the consumer basket, imported intermediate content of items in the consumer basket, the regime of inflation and invoicing currency.
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Notes
Trade openness ratio = (exports+imports)/total supply
As in Allington et al. (2005), these studies use sector-level data in computing tradable and non-tradable CPI.
Also, Çiftçi and Yılmaz (2018) show that the inflation persistence and exchange rate pass-through to consumer prices are more prominent in the regime with sizeable import price shock.
COICOP 1999–CPA 2008 correspondence table. (http://ec.europa.eu/eurostat/ramon/miscellaneous/index.cfm?TargetUrl=DSP_COICOP_1999_CPA_2008)
Classification of goods and services based on sectoral trade openness rates involves some limitations. In particular, the non-existence of item-level production data is a significant issue in the analysis. For a detailed discussion see Dixon et al. (2004).
Table 3 reports weights of different groups of items in the 2020 consumer basket. Shares of respective groups can be analyzed from Table A.1 and Table A.2 in online appendix A.
For an excellent introduction to MS models, see Hamilton (1994).
Details about MS models can be found in Türkvatan (2022).
Estimation results including AIC, BIC and RCM values are available upon request.
Figures obtained from the estimation of MS models with the smoothed probabilities for each reference series (annual change of monthly series) are displayed in Figure C.1 to Figure C.23 in online appendix C.
Basket is a weighted average of the US dollar and Euro, in which currencies are assigned equal weights.
The results for the sub-period analysis are available upon request.
The real effective exchange rate (REER) is the weighted average of a country’s currency in relation to an index or a basket of other major currencies, procured by purifying relative price effects. The weights are determined by comparing the relative trade balance of a country’s currency against each currency within the index. Therefore, it reflects the value of a domestic currency against other currencies adjusted for relative prices. REER is expressed in terms of domestic currency; therefore, an increase in REER shows a real appreciation in domestic currency. The appreciation in domestic currency implies that with one unit of domestic currency it is possible to afford more imported goods and services. Cheaper imports, in turn, are expected to pressure domestic prices, leading to a negative relationship between REER and domestic inflation.
Logically, world imports should be equal to world exports in terms of values, volumes and prices. However, the CBP World Trade Monitor shows an increasing discrepancy in global value and price levels since 2010: Import values and prices are above export values and prices, respectively, while import volume and export volume coincide relatively well. There are several reasons why in practice they are not equalized, including not covering all countries in world trade, measurement errors and incompleteness of the data (WTM 2019). We examine if this increasing discrepancy has a differentiating impact on the relationships reported in Table A.21 and Table A.22. Our results report no significant impact difference; the results are almost a mirror of the results reported in the respective tables. The results are displayed in Table A.23 and Table A.24.
To analyze the role that the energy items in the consumer basket play the following 4-digit items with total weight of 10.5% is excluded from the consumer basket: 0451-Electricity (2.87%), 0452-Gas (2.36%), 0454-Solid fuels (0.79%), 0722-Fuels and lubricants for personal transport equipment (4.49%). In fact, 0451-Electricity and 0452-Gas items are excluded from non-tradable index. However, 0454-Solid fuels and 0722-Fuels and lubricants for personal transport equipment items are excluded from tradable index. Moreover, 0451-Electricity item is excluded from low intermediate import index, while the other three items are excluded from high intermediate import index.
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Saygılı, H., Türkvatan, A. Tradable and non-tradable inflation in Turkey: asymmetric responses to global factors. Empir Econ 65, 973–1006 (2023). https://doi.org/10.1007/s00181-023-02364-3
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DOI: https://doi.org/10.1007/s00181-023-02364-3
Keywords
- Inflation regimes
- Tradable/non-tradable inflation
- Markov regime-switching models
- Probability score analysis