The Relationship Between Inflation and Welfare

Abstract

The fact that prices of goods and services do not fluctuate for a long period of time shapes the welfare level of countries through direct and indirect effects on the one hand, and on the other hand, it is of great importance in terms of preventing the distribution of income, which is one of the main economic policy objectives. In many countries with high levels of welfare, the common feature that stands out is that the general level of prices does not fluctuate significantly. The same is actually true for many developing countries. The importance of this issue for Türkiye, which is in the same country classification, has been the main motivation for this study. In this study, the relationship between the change in the general level of prices and the level of welfare has been tried to be revealed by using quarterly data between 1987-2017. Since there is no single variable that can be taken as the basic measure of welfare level in many national and international sources, we first obtain a welfare index from a utility function we use. Then, before establishing the relationship between this index and inflation rates, which are the main indicator of the general level of prices, the stationarity of the series is determined by Augmented Dickey-Fuller and Phillips Perron unit root tests. Using the Autoregressive Distributed Lag (ARDL) cointegration test, it is found that there is a long-run relationship between inflation and welfare. Moreover, the Granger causality test showed that there is a causality between these two variables from inflation to welfare. Finally, the Vector Autoregressive (VAR) model is estimated, and Impulse-Response and Variance Decomposition analysis are performed. The study shows that price changes in Türkiye reduce the rate of welfare growth, but do not prevent welfare growth as a whole.