Abstract

Inflation has imposes several costs on a society and an economy. An existence of these costs, which devastate the economy and are expected to increase with increasing inflation rate, reveal the importance of the price stability. This study has two aims. Firstly, relatively low and high inflation regimes of the Turkish economy are determined by applying Bai and Perron (1998, 2003) structural break methodology. Secondly, whether there is a change in the volatility of the inflation rate according to different inflation regimes is investigated. The structural break analysis shows that there are two structural breaks at the inflation rate. The first break is occurred in the year of 1977. With this break, the Turkish economy passed to the high inflation regime from the creeping inflation regime. The second break is occurred in the year of 1999. With this break, although the inflation rate is decreased, the Turkish economy still has been at the high inflation regime. Results of the volatility analysis show that creeping (high) inflation regimes have associated with low (high) inflation volatility. Therefore different inflation regimes of the Turkish economy have differentiated with not only mean inflation rate but also variance of the inflation rate. Structural break dates obtained in this study imply that any policies which have detrimental effects on the independence of the central bank, fiscal discipline or fundamentals of the banking sector might increase the inflation rate.