Is there the time‐inconsistency problem in Turkey?

Abstract

PurposeThe purpose of this paper is to analyze the time‐inconsistency problem between inflation and unemployment rate series for Turkey.Design/methodology/approachThe validity of the Barro‐Gordon model's implications is tested by using state‐space form and a Kalman filter. In order to investigate the long‐run effects of the time‐inconsistency problem, unit root and co‐integration tests are applied. First, a Hodrick‐Prescott filter is used to test the short‐run effects. Then the modified Barro‐Gordon model's constraint is applied to the detrended inflation and unemployment rate.FindingsThe results of this study suggest that both inflation and unemployment series are not stationary and they include the unit root, but that first differences of the two series are stationary. The co‐integration test results also do not support the Barro‐Gordon model's implications for the long‐run behavior of inflation and unemployment: the two variables are not cointegrated.Originality/valueThe results of this study suggest that the time‐inconsistency problem for Turkey can be valid in the short‐run, but sufficient proof cannot be found to support the Barro‐ Gordon model's implications for the long‐run.