A Sectoral Approach to Inflation Expectations in the Turkish Economy: The Vector Error Correction Model (VECM) and Time-Varying LA-VAR Granger Causality Analysis

The high inflation rates in Türkiye in recent years highlight the importance of expectations and motivate studies on this issue. This study employs a Vector Error Correction Model (VECM) alongside a Time-Varying LA-VAR Granger Causality framework to investigate the relationship between inflation expectations and the prices of goods and services in Türkiye over the period 2013:01–2023:12. The results demonstrate the existence of co-integrating links between the variables. The results show that an orthogonalized shock to goods price has a temporary effect on inflation expectations, but an orthogonalized shock to services price has a permanent effect on inflation expectations. In addition, according to time-varying Granger causality analysis, the service sector, in particular, has a significant impact on inflation expectations. In this context, expectations are a significant factor that limits the effectiveness of the central bank\\\'s monetary policies. Although it is not a task that monetary policy can carry out on its own, the central bank should implement regulations that ensure stability regarding price movements in the service sector.