The impact of monetary policy on inflation expectations uncertainty: A behavioral analysis for Turkey
Description
Inflation expectations uncertainty is a crucial indicator of the effectiveness of monetary policy. Changes in this uncertainty over time hinder the alignment of inflation expectations with the policy target, thereby weakening the management of expectations. The inability to explain these changes within the framework of the rational expectations hypothesis, which assumes homogeneity among agents, has contributed to the growing prominence of behavioral macroeconomic models that incorporate heterogeneity and psychological or internal processes in expectation formation. In this context, the primary objective of this study is to examine the effects of inflation, interest rates, output gap, exchange rate, credibility gap, and forecast errors on the uncertainty of inflation expectations over the period 2006:Q1–2023:Q4, taking the introduction of explicit inflation targeting in Turkey as the starting point and employing three behavioral models. The results indicate that increases in inflation and the credibility gap were the most significant drivers of rising inflation expectations uncertainty. Moreover, heightened perceptions regarding the persistence of exchange rate and inflation shocks contributed to this uncertainty. Finally, behavioral changes arising from the failure to adjust monetary policy in accordance with the inflation target, along with the resulting forecast errors, were found to further amplify inflation expectations uncertainty.
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Institutions
- Bursa Uludağ Üni̇versi̇tesi̇Bursa Province, Bursa