| Summary: | In this study, it is employed that Expectations-Augmented Philips Curve Model to investigate the link between inflation and unit labor costs, output gap (proxy for demand shocks), real exchange rate (proxy for supply shocks) and price expectations for Turkey using monthly data from 2000:01 to 2004:12. The methodology employed in this paper uses unit root test, Johansen Cointegration Test to examine the existence of possible long run relationships among the variables included in the model and a single equation error correction model for the inflation equation estimated by OLS to examine the short run dynamics of inflation, respectively. It is find that in the long run, mark-up behaviour of output prices over unit labor costs is the main cause of inflation, real exchange rate has a rather big impact on reduced inflation and demand shocks don’t led to an increase in prices. The short run dynamics of the inflation equation indicate that supply shocks are the determinant of inflation in the short run. It is also find that exchange rate is the variable that trigger an inflation adjustment the most rapidly in the short run.
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