INFLATION EXPECTATIONS AND CENTRAL BANK COMMUNICATION IN TURKEY

This study assesses how inflation expectations respond to inflation targets, forecasts, and realizations with a particular focus on whether the sensitivity of expectations to inflation realizations increases with the level of inflation. For the sample period between April 2006 and May 2012, our findings indicate that forecasts, targets, and past inflation are important determinants of inflation expectations. Moreover, expectations are more sensitive to inflation realizations at higher levels of inflation. Interestingly, we find that sensitivity of expectations to inflation has decreased over time, especially since the end of 2011 despite a very rapid and sizable increase in CPI inflation due to one-off factors. Our results suggest that the implementation of tight monetary policy and intensive communication efforts by Central Bank of the Republic of Turkey might have reduced the sensitivity of expectations to the inflation realizations. [PUBLICATION ABSTRACT]