Analysing the Effect of Inflation on Economic Growth in Türkiye's Industrial Sector

Abstract

This paper examines the effect of inflation on economic growth of the industrial sector in Türkiye from 1998:Q1 to 2022:Q4. To achieve this objective, the producer price index is used as a measure of industrial inflation and industrial production index as a measure of the growth of industrial sector. Also, the study captures the effect of exchange rate and unemployment rate. Using a Vector Autoregressive model and Block Exogeneity Granger Causality test, the empirical results suggest that a shock in inflation causes economic growth in the industrial sector to decrease in the short run, increase slightly towards the long run but later drop continually until it becomes stabilized. Also, a shock in economic growth of industrial sector causes a slight increase in the short run and keeps fluctuating in the long run. A shock in unemployment rate causes growth to increase in the short run but fluctuate in the long run. A shock in exchange rate causes growth to decrease in the short run but in the long run it is observed to decrease. The implication of these results is that, in Türkiye inflation causes the economic growth to drop in the short run but eventually stabilizes in the long run. Furthermore, economic growth Granger causes inflation while inflation does not Granger cause economic growth. Based on these findings, policymakers should not over-jealously promote growth that exerts huge inflationary pressures in the economy. Therefore, policymakers need to put anti-inflationary policies in the forefront of economic policies in Türkiye.