Financial crisis, monetary policy reform and the monetary transmission mechanism in Turkey

Abstract

Turkey experienced a financial crisis in 2000–2001, which led to significant financial reforms. The reforms resulted in a switch to a floating exchange rate, granted greater central bank independence and pursuit of a more credible monetary policy. Investigation of the channels of monetary policy in both periods finds that monetary policy's output effects have been strengthened considerably by the reforms. In the pre-crisis period, monetary policy was highly inflationary, while in the post-crisis period, monetary policy targets low inflation and has become a tool for output stabilization. These results support the importance of central bank independence and a credible policy.

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