prof. Dr. Demiralp: Inflationary effect comes from the expectation channel

Koç University Faculty Member Prof. Dr. Selva Demiralp commented on the post-election economy and monetary policies to Bloomberg HT.

Demiralp stated that if the current policy continues, the inflation will stick to 40 percent, and that if the “expectation inflation” decreases, the inflation will also decrease.

Demiralp said, “A heavy burden will be taken along with the implementation of the disinflation policy. In order to reduce this burden, if the message ‘Our team knows this job and will do whatever it takes’ is given, we can reduce the inflation that will occur with the effect of expectation. Inflation can come from high demand, cost and expectation. Monetary policy is not very effective in cost-inflation. When we say cost impact, we mean factors such as disruptions in supply chains after the pandemic, the Russia-Ukraine war. The inflationary effect comes from the expectation channel,” he said.

Demiralp continued his words as follows:

“If the central bank’s credibility is high, market interest rates decrease with policy rate hikes. It is not easy to come to low double digits in inflation. The lower the expectations go without battering the market by raising the central bank’s interest rates, the more you should have a reducing effect on the economy. I used to calculate the output gap. Unfortunately, it is now out in the inflation report. “There is no deficit, but this is a guide. We see that the demand is gradually decreasing due to high inflation, we see that there is a tightening in credits. The rest of this is about expectation management. If I were a manager, I would put expectation management first.”

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