Inflationary effect of crude oil prices in Turkey

Abstract

It is generally acknowledged that changes in oil prices affect economic welfare in ways that are not entirely reflected in transactions in the oil market. In this article, by using the 1990 input-output table, the inflationary effects of crude oil prices are investigated for Turkey. Under fixed nominal wages, profits, interest and rent earnings, the effect of increasing prices of oil on inflation is limited. However, when wages and the other three factors of income (profit, interest and rent) are adjusted to the general price level that includes the oil price increases, the inflationary effect of oil prices becomes significant. Hence, indexation could have very severe effects on an economy when oil prices increase and, in some cases, could even lead to hyperinflation. © 2002 Elsevier Science B.V. All rights reserved.