The Missing Link Between Inflation and Macroeconomic Fundamentals: Evidence from Türkiye

This study investigates the structural relationship between inflation and key macroeconomic fundamentals in Türkiye, an emerging economy characterized by persistently high and divergent inflation dynamics. Using monthly data for the 2011–2024 period, we apply the Kapetanios, Shin, and Snell (KSS) nonlinear cointegration framework, which captures asymmetric adjustment dynamics that standard linear models fail to detect. The aggregate model reveals no long-run cointegration between inflation and monetary and fiscal fundamentals, indicating that conventional transmission channels have weakened and inflation has become decoupled from its traditional determinants. Pairwise analyses show that this decoupling is not complete; rather, the relationship persists in a fragmented, nonlinear, and variable-specific manner. Short-run Granger causality tests further reveal that only fiscal expansion and real money supply retain explanatory power over inflation, while the policy rate proves ineffective. Collectively, these findings indicate that inflation in Türkiye has increasingly evolved into an endogenous and self-reinforcing process, shaped more by policy incoherence than by any single macroeconomic driver. Restoring a coordinated, rule-based monetary and fiscal policy framework emerges as a necessary condition for re-establishing the link between inflation and macroeconomic fundamentals and ensuring durable price stability.