Modelling the Distributional Effects of the Cost-of-Living Crisis in Turkey and the South Caucasus: A Microsimulation Analysis

This study analyzes the distributional effects of the cost-of-living crisis in Turkey and the South Caucasus by employing microsimulation techniques and household budget survey data. It investigates the changes in prices between December 2020 and 2022, highlighting the combined impact of the COVID-19 pandemic and the post-war price changes in Ukraine. By comparing welfare systems and price fluctuation patterns, the study sheds light on the differing impacts across neighbouring countries. The effects of inflation are closely related to specific price increases for various goods and the distribution of household budgets. In particular, lower-income countries and individuals allocate a higher share of their budgets to essential goods such as food, heating oil, and electricity. Notably, this is the first comparative analysis of its kind in the developing world, with previous studies limited to the European Union. We expanded the static incidence analysis across two dimensions. First, we looked at a way to measure welfare called comparative advantage. It shows how much money someone needs to keep their utility level the same when prices go up or down. It is worth noting that comparable levels of inflation regressivity are due to different interactions between the magnitude of price inflation and its disproportionate impact on the income distribution. We also applied the Atkinson social welfare function to analyse equally-distributed-equivalent income, decomposition changes in welfare into two components: the distributional effect and the size effect. Second, in all countries, the savings rate rises as income increases. Consequently, when prices increase faster than wage growth, lower-income groups cannot quickly absorb these rises. Therefore, they feel the impact of price increases more significantly.