Investigation of the Impact of Structural Break on the Relationship between Inflation and Inflation Uncertainty in the Turkish Economy

This article examines the relationship between inflation and inflation uncertainty in the Turkish economy in this period 2004:01-2014:12. This relationship is explored in two ways: a) with the effect of structural breaks; b) without the effect of structural breaks. In fact, with regard to the main structural break have occurred over this period, we examine whether structural break has affected the causal relationship between these two variables or not. Conditional Heteroscedasticity Models are used to obtain inflation uncertainty. The EGARCH model has been identified as the most appropriate model for inflation uncertainty. Lee-Strazicich test is applied for checking any structural break in inflation and inflation uncertainty series. Then, the relation between inflation and its uncertainty is tested using Granger causality Test. This study shows that the structural break has no effect on the Friedman-Ball hypothesis. This hypothesis is supported whether with the structural break or without the structural break. But Cukierman-Meltzer’s view is affected by the structural break. Since this hypothesis imply that inflation uncertainty causes inflation, so politicians need to implement policies that pay more attention to inflation uncertainty.