Nonlinearity and structural stability in the Phillips curve: Evidence from Turkey

In this paper, we investigate possible nonlinearities in the inflation-output relationship in Turkey for the 1980-2008 period. We first estimate a linear bivariate model for the inflation rate and output gap, and test for linearity of the estimated model against nonlinear alternatives. Linearity test results suggest that the relationship between the inflation rate and output gap is highly nonlinear. We estimate a bivariate time-varying smooth transition regression model, and compute dynamic effects of one variable on the other by generalized impulse response functions. Computed impulse response functions indicate that inflation-output relationship in Turkey during the analyzed period was regime dependent and varied considerably across time.