Abstract

The aim of this study is to analyze the hypothesized positive relationship between relativeprice volatility and the rate of inflation with respect to the following 10 main expenditurecategories in Turkey: 1) Food, Beverages, and Tobacco, 2) Clothing and Footwear, 3) Housing,4) Furniture and Household articles, 5) Health, 6) Transportation, 7) Entertainment and Culture,8) Education, 9) Restaurants, Cafeterias, and Hotels, 10) Other Goods and Services.

We first calculate the measures of relative price volatility for each of the above expenditure categories by taking the general consumer price index for Turkey as the basis and using the respective price indices from the seven geographic regions. Next, we examine the relationship between the thus constructed relative price volatility data and the rate of inflation for each of the 10 main expenditure categories. We estimate the economic model constructed for this purpose by the ordinary least squares (OLS) method and test and interpret the estimated parameters for their economic and statistical significance. The results show that higher inflation rates lead to higher relative price volatility in most of the expenditure categories. Thus, we provide evidence in favour of the volatility hypothesis in Turkey.