ASSESSING THE DOMINANCE OF SUPPLY-SIDE VERSUS DEMAND-SIDE PRESSURES ON TURKISH INFLATION: AN SVAR METHODOLOGY

Abstract

The recent surge in inflation in Turkey has raised concerns among monetary policymakers in the country. The main objective of this study is to distinguish between supply and demand pressures to determine the factors behind the fluctuations in the general price level in the Turkish economy. The structural vector autoregressive (SVAR) approach is utilized to separate the contribution of supply and demand factors to inflation. The study uses quarterly data from 2003:1 to 2021:4. The findings reveal that supply-side factors are more dominant in the inflationary process than demand-side factors. The results suggest that policymakers should consider supply-side shocks in their monetary policy decisions to optimize inflation rate targeting. This study contributes to the existing literature by providing empirical evidence on the sources of inflationary pressures in the Turkish economy and the relevance of supply and demand factors in conducting effective monetary policy