The asymmetric effects of the current account balance on inflation

Abstract

Purpose: We aim to highlight the asymmetric relationship between the current account balance and inflation via the nonlinear boundary test approach for the period 2002:01-2020:10. We analyze the Turkish economy because Turkey has started implementing a new economic policy, which mainly aims to control inflation by maintaining a current account surplus. As a result, the primary purpose of this research is to determine the influence of the current account balance on local inflation, as well as to assist in the formulation of appropriate economic policies to minimize any negative effects on the local economy. Methodology: The nonlinear boundary test approach (NARDL) is used for the 2002:01-2021:10 data period due to the possibility of long-term nonlinear relations between the inflation rate and the current account balance. Results: According to the analysis findings, there is a long-term cointegration relationship between variables. It is deduced that while there exists long-term asymmetry between the current account balance and inflation, the coefficients themselves are not statistically significant, and magnitudes are negligible. However, the effect of dollarization and the lagged values of the CPI on current inflation are statistically significant and substantial, which underpins the importance of inflation inertia, inflation expectations, and the pass-through effect. Conclusion: With a view to stabilizing inflation, policymakers should prevent dollarization by taking the necessary measures.