Asymmetric adjustment of retail gasoline prices in turkey to world crude oil price changes: the role of taxes

We empirically investigate the impact of shocks to world crude oil prices on retail gasoline prices in Turkey during the 1991-2007 period. Using a Structural-VAR methodology and monthly frequency data, we report that Turkish retail gasoline prices respond significantly to increasing world crude oil prices, but not to decreases. During the estimation period, 70 to 80% of the retail gasoline price was attributable to taxes which were subject to frequent changes by the council of ministers. Although historical data on gasoline taxes is not publicly available, based on the importance of taxes on gasoline price formation in Turkey, we argue that the source of asymmetry is mainly attributable to government price setting policy choice for gasoline. Based on the observed asymmetry from empirical analysis, we further argue that rather than smoothing the impact of volatility in world crude oil prices on Turkish retail gasoline prices, the Turkish fiscal authorities attempted to maximize tax revenue from gasoline.Retail gasoline prices, Rockets and feathers hypothesis, Emerging markets, Fiscal policy, SVAR, Retail diesel oil prices

Oil Prices, aggregate economic activity and global liquidity conditions: evidence from Turkey

When compared to the previous literature which analyzes oil price changes and real economic activity for countries influencing world demand and/or supply, this study is first of its kind in investigating the relation within the context of a small open economy, Turkey. Parallel to the results of Blanchard and Gali (2007) for developed economies, we first report for Turkey that the negative response of real output to oil price increases have diminished since the early 2000s. Other than using different versions of oil price changes and real output growth, which are the standard variables used in the empirical literature, in our next set of estimations we also include variables to account for global liquidity conditions. Once these variables are incorporated, we unveil that the negative impact of oil price changes on aggregate economic activity is significant even in the post-2000 period.

Estimating Central Bank Behavior in Emerging Markets: The Case of Turkey

Design of policy rules for an an emerging market central bank (EMCB) operating in an inflation-targeting framework presents additional challenges beyond those for describing the behavior of a central bank in a developed economy. Even though an inflation-targeting regime entails abolishing the exchange rate target in favor of an inflation target, it is more difficult for an EMBC to ignore movements in exchange rates given the relatively shallow depth of financial markets and the the high degree of dollarization. Additionally the EMCB may be forced to change the pursued exchange rate regime following a capital account reversal so that linear Taylor rules may be inadequate for describing EMCB reactions. We develop an empirical framework that addresses these issues and propose a new methodology to estimate unobserved variables such as expected inflation and potential output within the rule. Specifically, we employ a structural, nonlinear Kalman filter algorithm to estimate time-dependent parameters and unobserved variables, and we experiment with various exchange rate mechanisms that can be employed by an EMCB. This approach allows us to track any changes in EMCB behavior - including regime shifts - following a switch to inflation targeting. Using post-2001 data from Turkey, which is a fairly dollarized small open economy, we document that the Central Bank of Turkey has given relatively more importance to the inflation gap than to the output gap or to exchange rates, but not until some time after it had switched to an inflation-targeting framework.Dual Extended Kalman Filter, Taylor Rule, inflation targeting, emerging markets