Inflation Prediction and Inflation Volatility for Turkey

Hakan Eygü, Hayati Aksu, Muhammad Asad Ullah Moavia

Abstract


In early development of macroeconomic literature, policy makers focused on stability and constancy in monetary policy. However until now, policy makers are unable to make reliable prognostication in economic literature. The monetarist claims that under active monetary policy, inflation deviation should be unpredictable. Recently policy makers apply complicated econometric models such as Dynamic Stochastic General Equilibrium model (DSGE) and Bayesian VAR model in order to calculate an appropriate forecasting, yet, researchers prove these models very poor and hence these models do not give any further insights for policy making. The aim of this paper is too select an alternate technique that is robust, reliable, unbiased and efficient. For this reason, we estimate the inflation and its volatility for Turkey based on stochastic differential equation (SDE) under mathematical simulation. After computing stochastic parameters under SDE, our results establish that inflation volatility behaviour follow a systematic pattern from ex-ante to ex-post period for the Turkey. We can certainly reason that mathematical techniques are robust and give sufficient traces for inflation uncertainty rather than choosing DSGE and Bayesian VAR. Moreover, Euler Discretization and Unbiased Discretization process explain that the intensity for inflation volatility is recovered in the long run. Euler Discretization and unbiased Discretization confirm that inflation deviation is predictable for Turkey.

DOI: 10.5901/mjss.2016.v7n1p361


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Mediterranean Journal of Social Sciences ISSN 2039-9340(Print) ISSN 2039-2117(Online)

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