Abstract
The relationship among inflation, unemployment, and economic growth can be treated as a trade-off in general. When the economy is in recession, inflationary pressures are expected to decrease while unemployment is increasing. On the contrary, a decrease is expected while inflationary pressures are rising. Thus the relation between these twin macroeconomic variables and their relation to economic growth are a focal point for developing countries. The aim of this study is analyzing the relationship among unemployment, inflation, and economic growth in Turkey by alternative methods. Thus the causality among these variables is tested with modified Wald statistic developed by Toda-Yamamoto. Findings obtained from causality test will provide policy recommendations for Turkish economy on a macroeconomic level.
TopLiterature Review
Being major macroeconomic variables of an economy, unemployment, inflation, and economic growth relation are often discussed in the literature, though they might be in the characteristic of variability from period to period. Like all of the other economies in the world, it is seen that the literature searching the causality relation among those factors which regard financial and real dimensions of the economy as well as in Turkey supports the stated evaluation. Focusing the literature in terms of unemployment, inflation, economic growth and the constraint of Turkish economy; the outstanding findings could be summarized as:
Uysal and Erdoğan (2003, p. 45) focused on the relation between the unemployment rates and price level in Turkey between 1980 and 2002. In the study, the related time period was evaluated according to different periods. Hereunder, the fact that there is a positive relation among variables in the 80s whereas there is a negative between 1990 and 2002 is remarkable. Karaca (2003, p. 254) searched the relation between inflation and growth in Turkey using quarterly data for the period of 1987-2002 and observed the existence of one-way Granger causality from inflation to growth. It is emphasized that the inflation in the economy of Turkey in the related period downgraded the growth rate.
Berber and Artan (2004, p. 115) analyzed the relation between inflation and economic growth in Turkey for the period of 1987-2003 and they found out one-way causality relation from inflation to economic growth. Furthermore, it is also a remarkable finding that inflation influences economic growth negatively. On the other hand, Terzi and Oltulular (2004, p. 31) analyzed the relation between the inflation and growth rates at the sectoral level in the economy of Turkey with annual data in the period of 1923-2003. The findings point out a negative causality relation from inflation to sectoral growth. Considering those findings, it is emphasized that inflation is a considerable obstacle to growth and price stabilization is significant in this respect.
Key Terms in this Chapter
Economic Growth: The increase in an economy’s production possibilities frontier over time. There are three main causes of economic growth: increases in the stock of capital; technological progress embodied in new capital equipment; and growth in labor input due primarily to population growth, immigration, and changes in participation rates.
Unemployment Rate: Unemployment rate is the number of unemployed people as a percentage of the labor force, where the latter consists of the unemployed plus those in paid or self-employment.
Inflation Rate: The annual percentage increase of the cost of living as measured by the consumer price index. Consumer price indices are based on a representative basket of goods and services purchased by consumers in an economy. Composition and relative weights of the basket are reviewed periodically.
Inflation Targeting: Inflation targeting is a monetary policy in which a central bank has an explicit target inflation rate for the medium term and announces this inflation target to the public. The assumption is that the best that monetary policy can do to support the long-term growth of the economy is to maintain price stability. The central bank uses interest rates as its main short-term monetary instrument.
Phillips Curve: The Phillips curve is a single-equation empirical model, named after A. W. Phillips. Phillips curve states the negative correlation between the unemployment rate and rate of inflation. The decreases in unemployment will end up higher rates of inflation.
Granger Causality: The Granger causality test is a statistical hypothesis test for determining whether one time series is useful in forecasting another, first proposed in 1969. The intuition behind the Granger causality test is the quite straightforward. Ordinarily, regressions reflect “mere” correlations, but C. Granger argued that causality in economics could be tested for by measuring the ability to predict the future values of a time series using prior values of another time series.