Relative price variability and the Phillips Curve: Evidence from Turkey

Purpose: Using data from Turkey, this paper seeks to investigate whether relative price changes can help to explain the Phillips Curve relationship between inflation and output. Design/methodology/approach: Building on work by Ball and Mankiw, the paper includes measures of the variance and skews of relative price adjustment in an otherwise standard model of the Phillips Curve. It employs a bounds-testing approach based on an ARDL model to establish long-run relationships. It then uses error correction models to analyze short-run dynamics. Findings: No evidence was found for a long-run relationship between inflation and output. However, a long-run relationship is in fact found, once the variance and skew of relative price changes are included as regressors. The error correction model implies plausible short-term dynamics in this case. Originality/value: This paper combines two distinct literatures, on the Phillips Curve and on the distribution of relative price changes, showing that insights from the latter can be essential in constructing coherent models of the Philips Curve.