Has ‘inflation targeting’ increased the predictive power of term structure about future inflation: evidence from Turkish experience?

Abstract

This article contributes to the vast literature on the predictive power of term structure on future inflation by focusing on an emerging market case: Turkey. The most important result emerging in our article is the following: Monetary policy change is an important determinant of the relationship between term structure and inflation to the extent that even the existence of the relationship critically depends on the nature of the monetary policy regime. In our case, the change in monetary policy is associated with the beginning of the implementation of an Inflation Targeting (IT) regime. While, before IT, the information in term structure does not provide any predictive power for future inflation; this phenomenon seems to be completely reversed after IT. Since the implementation of IT, the term structures of interest rates seem to have gained considerable forecasting power for future inflation.

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