Globalization and flattening of Phillips Curve in Turkey between 1987 and 2007

In the last two decades, there have been important changes in inflation dynamics in Turkey. While average inflation rate, inflation volatility and inflation persistence declined, the prices of tradable goods have shown an increase less than prices of non-tradable goods. The aim of this paper is to inquire whether the globalization has an effect on this change and to test whether and how it affected the slope of the Phillips Curve. The findings point out that global activity did have an effect on domestic inflation rate and that Phillips Curve got flatter. ► We study the relationship between globalization and domestic inflation rate. ► OLS estimations point out that global output gap has an effect on inflation rate. ► TVP estimations indicate the coefficient of domestic output gap declined over time. ► It hampers the ability of monetary policy to stabilize prices and economic activity. ► CBRT should pay even more attention to developments of the global output gap.