CORE INFLATION IN TURKEY: AN ECONOMETRIC APPROACH

In this paper, core inflation in the Turkish Economy is estimated using the structural vector autoregressive (SVAR) approach proposed by Quah and Vahey (1995). One of the main problems for a monetary authority with an explicit or implicit goal of price stability is to have a proper assessment of the impact of external shocks on final domestic prices. In order to explain this impact, Quah and Vahey's model were extended to include import prices. Assuming that movements in headline inflation are stemmed from supply, import price, and demand shocks, core inflation is estimated as a component of headline inflation, which has no effect on real output in the long- run or, which is driven by demand shocks.