Backward-looking Phillips curve, forward-looking Phillips curve and an application on Turkey

Abstract

Inflation is one of the most important problems which should be overcome both by the governments and economic agents. The existence of inflation in an economy causes a destruction in the macroeconomic balance indicators (decreasing growth rate, rising unemployment and failure in income distribution, etc.). The uncertainties caused by the high inflation rates in Turkish history, has raised the inflation expectations. In this study, whether inflation in Turkey is determined as forward-looking or backward looking has been investigated for the period between 1997:04 and 2006:04. The obtained hybrid model has been tested by GMM method. According to the result of the estimation, it has been seen that inflation is determined as both forward-looking and backward-looking; however, forward-looking is slightly overweighing the other. © EuroJournals Publishing, Inc. 2010.