DO INFLATION EXPECTATIONS CONVERGE TOWARD INFLATION TARGET OR ACTUAL INFLATION? EVIDENCE FROM EXPECTATION GAP PERSISTENCE

Abstract

Anchoring inflation expectations to inflation targets rather than actual inflation implies a credible monetary policy. We utilized a quantile autoregression approach developed by Koenker and Xiao (2004) in order to analyse whether the inflation expectations converge toward inflation targets or actual inflation in Turkey. Our analysis suggested that inflation expectations have been anchored to both inflation targets and actual inflation. Furthermore, no convergence toward inflation targets in larger quantiles exists, although inflation expectations have globally followed actual inflation. These findings provide strong evidence favouring imperfect credibility in Turkey.