Measurement of NAIRU: What is new and what is next for the Turkish economy?

Abstract

The Turkish economy has been exposed to several risks after the global crisis. These emanated mostly from external factors such as the adoption of unconventional monetary policies by advanced economies, the sovereign debt crisis in the Euro area and the exit from the prolonged use of extraordinary anti–crisis measures. However, policy measures adopted against these risks led to a notable slowdown in the Turkish economy, raising questions about a middle income trap. In the meantime, starting from 2012, Turkey was exposed to a massive influx of Syrian refugees due to the civil war in Syria and this forced immigration had various outcomes on labor markets and the general price level. This study takes the above discussion as its starting point and attempts to estimate NAIRU (Non Accelerating Inflation Rate of Unemployment) for the Turkish economy, which is assessed to have changed in the meantime. NAIRU is an important metric for the monetary policy stance as it denotes the level of the unemployment rate that is compatible with a stable level of inflation. In particular, the analysis shows that NAIRU has increased against these developments, but more proportionately than the actual unemployment; while inflation stayed relatively stable. Also, the sensitivity of inflation to unemployment gap remained steady recently, which implies that the overall contribution of unemployment gap to inflation has certainly decreased. Obviously, this has important implications regarding the labor market structure and the monetary policy conduct. Also, the influx of refugees, which feeds into higher NAIRU, may have a dampening effect on inflation and this should also be taken into account in the implementation of the monetary policy. Yet, policy design should be based on the fact that these results are constituted with a short-term outlook, while long-term effects will be more wide-ranging, especially pertaining to the refugee inflow.