Analysis of Relationship between the Consumer and Producer Prices in Turkey using Alternative Estimation Methods

The relationship between consumer prices and producer prices has been discussed in the literature. In this study, the existence and dimensions of the relationship in question for Turkey are examined between the consumer (CPI), the producer (D-PPI), and the agricultural sector (AGR-PPI) prices. The stationarity characteristics of time series are examined using five different tests in the study in which the period between January 2011 and June 2020 is covered. The cointegration relationship between the time series is investigated with the standard Johansen, Johansen with structural break, and Lütkepol with structural break, and the short-term dynamics of the relationship are analyzed with the Vector Error Correction model. Unlike the literature, the long-term relationship between time series has been estimated using different estimation methods. The findings indicate that there are statistically significant cointegration relationships between them, as well as short-term causality relationships. In the long run, it is determined that the effect from AGR-PPI and D-PPI to CPI is statistically significant but small in size. On the other hand, the effects from the CPI to AGR-PPI and D-PPI are significant and bigger in size. Considering these findings, it can be claimed that a two-way relationship between producer prices and consumer prices are exist in Turkey for 2011-2020 period, but consumer prices have stronger effect on producer prices.