Relative price variability and the Philips curve: Evidence from Turkey

Abstract

We argue that relative price changes are a key component of the Phillips curve relationship between inflation and output. Building on work by Ball and Mankiw, we propose including measures of the variances and skewness of relative price adjustment in an otherwise standard model of the Phillips curve. We examine the case of Turkey, where distribution of price changes is especially skewed and where the existence of a Phillips curve has been questioned. We have two main findings: (i) inclusion of measures of the distribution of relative price changes improves our understanding of the Phillips curve trade-off; (ii) there is no evidence of such a trade-off if these measures are not included.