Addendum to tomorrow's Hurriyet column

As I explain in the previous post, I needed to post this addendum before the column is published, so here it goes.

First, on my methodology: I use a VECM with seasonally-adjusted inflation, FAO's (not the toy retailer) food price index, oil rices (Brent) and exchange rate. I then extend the framework with very simple demand measures such as output gap as derived from Industrial Production or Capacity Utilization Rate- since these are very rough proxies, and calculating the output gap is tricky, I wanted to do this separately.

Anyway, I found that a 10 percent increase in the FAO index and oil prices increase inflation 0.50 and 0.20 percent respectively. Almost all the full impact of both is registered in full in six months. 

I did not find any meaningful relationship with the output gap, but that's because of different assumptions were all giving different results, so I did not end up with much to report.

Citi Turkey economists, in their research note I quote a couple of times in the column, find slightly smaller numbers for food and oil prices, and their impulse response seems to yield slightly different results than mine. And they note the following with respect to the output gap:

Our results suggest that if the output gap remains at around 4%, this would raise core inflation by 0.9 percentage points in the rest of 2011. Without accounting for the spillover effects from core to other components of the CPI basket, this would in turn increase headline inflation by around 0.5 percentage points.

I have a couple of other points as well, but I'd better write them out after the column is published...

BTW, I found this ultra-cheesy title, so have a look at it for its sake, if for nothing else:)