Symmetric and asymmetric dynamics of output gap and inflation relation for Turkish economy

This paper uses symmetric and asymmetric testing procedures to examine the issue of the relationship between the output gap and inflation for the Turkish economy using data from 2002:01 to 2021:09. First, it analyses the cointegration by applying different cointegration tests taking into account structural breaks and asymmetric behaviour to reveal whether the relation varies between sub-periods. Afterwards, it examines the asymmetric causality between different shocks. Our empirical results indicate that there is a long-run relationship between series in the existence of two structural breaks and asymmetry. The results also show asymmetric causality running from positive (negative) output gap to positive (negative) inflation shock, and running from negative inflation shock to negative output gap shock. The overall findings indicate the importance of having in mind the structural breaks and asymmetric behaviour of macroeconomic variables in policy-making processes, such as in Turkey during high and volatile inflation.