ABSTRACT

The output gap is an important monetary policy tool in evaluating demanddriven pressures on inflation. The study aims to estimate the deficit in Türkiye between the years 2006-2022, the past period of inflation, and the effect of the dollar exchange rate change on inflation as two sub-periods. In this context, it is thought to contribute to the literature as it is an original study. Vector Autoregressive Model (VAR) was preferred as the method in econometric analysis. The econometric model is divided into two as the single-digit inflation period and the double-digit period. According to the results of the variance decomposition for the period 2006:1-2016:4, a significant part of the total change in inflation is explained by the output gap, dollar exchange rate, and past inflation, respectively. According to the variance decomposition results for the 2017:1-2022:2 period, a significant part of the total change in inflation is explained by the dollar exchange rate, output gap, and past inflation, respectively. According to the results of the Impact-Response analysis, the effect of past inflation on current inflation indicates inflation inertia. According to the results of the analysis, monetary policy and fiscal policy should act together to slow down the warming caused by the output gap in the economy. In the fight against inflation, it is important to re-establish the confidence factor of the central bank in order to break the inflation inertia. Policies aimed at increasing productivity and protecting the value of the lira play a critical role in reducing the exchange rate pass-through in inflation.