THE RATIONALITY OF INFLATION EXPECTATIONS IN TURKEY AND ITS EFFECT ON THE FUNCTIONING OF EXPECTATIONS CHANNEL

Abstract

Since the global financial crisis of 2008, the Central Bank of the Republic of Turkey has been using macroprudential monetary policies whose objectives are price stability and financial stability. The Central Bank can affect the real sector and achieve its objectives through the transmission mechanism. The expectations according to which agents determine their economic behavior play an important role in this mechanism. If these expectations are not rational, the expectations channel of the transmission mechanism cannot function efficiently. In this work, the aim is to find out if the inflation expectations of Turkish agents are rational within the framework of macroprudential policies; which in turn allows a good functioning of the channel of expectations. With this perspective, several empirical analysis have been conducted for the period January 2010-October 2022, using inflation expectations errors calculated from surveys conducted by the Central Bank. The run test, Wald test, Portmanteau test and unit root tests showed that consumer price inflation expectations for the current month, next 12 and 24 months and expectations for producer price inflation for the next 12 months are not rational because they are biased, auto correlated and systematic hence the effective functioning of the expectations channel is queried.