Regional inflation convergence in Turkey

The aim of the present article is to analyze the convergence of regional inflation rates in Turkey from 2004 to 2015 by adopting a distribution dynamics approach, namely discrete time Markovian chains. Convergence across regional inflation rates is politically a crucial matter for two reasons. First, if inflation rates differ largely between regions, monetary policy can hardly satisfy the needs of all regions equally. Such that, places which experience high inflation rates naturally require a contractionary monetary policy while the ones which experience low inflation need rather an expansionary monetary stance. Second, inflation differentials are likely to create a regional dispersion in real interest rates which induce differential effects on local economic growth. The outcomes of our research can be summarized in two groups. First, inflation disparities have declined over time, especially during the post-crisis period; after 2010. Hence, aggregate price stabilization and disinflation process in Turkey is coupled with convergence in inflation rates across regions. These results are confirmed using several methodologies (panel unit root tests and Kernel Density Estimates). Second, in addition to the findings in the literature, we found that regions change their relative inflation rate positions quite often. This indicates that regional inflation behaivor is random and non-structural as the relatively high and low inflationary places tend to change their quintiles frequently in time. Similarly, a geographical randomness of inflation is also verified using Moran I's test.