Inflation and inflation uncertainty in Turkey

This article investigates the relationship between inflation and inflation uncertainty, and the impact of monetary policy on this relationship using monthly Turkish inflation data over January 1984 to-October 2005. The results from various types of GARCH-M models indicate that higher inflation rates lead to greater inflation uncertainty. On the other hand, the effect of inflation uncertainty on inflation is found to be negative due to stabilization motives' dominating the opportunistic incentives of monetary authorities. We find strong evidence to support the view that inflation-oriented monetary policy has power to reduce the inflation persistence and eliminate uncertainty.