The role of exchange rate in inflation targeting: the case of Turkey

Metin Özdemir

12 citations0/0 files storedApplied Economics

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Market Dynamics and Volatility

Abstract

The role of the exchange rates in emerging market economies that have adopted inflation targeting (IT) is a critical and contentious issue in the relevant literature. This article investigates whether an exchange rate-augmented Taylor rule describes the Central Bank of Republic of Turkey’s (CBRT) monetary policy. Covering the period from 2002:1 to 2017:8 it also explores possible nonlinearities in the reaction function of the CBRT by employing a Threshold Vector Autoregressive (TVAR) model. The linear estimation of the model highlighted the importance of the exchange rate in monetary policy under IT. The results of the nonlinear model indicate that the stance of monetary policy was asymmetric with respect to exchange rate movements during the conventional IT period. However, the asymmetric monetary policy stance disappeared in the aftermath of the Global Financial Crisis. Increasing considerations of financial stability undermined the asymmetric policy stance of the CBRT in the post-crisis period.

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References

1988Testing for a Unit Root in Time Series Regression 1981Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root 1993Discretion versus policy rules in practice 1989The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis 2003Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks 1998Monetary policy rules in practice 2015Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence 1997Inflation Targeting: A New Framework for Monetary Policy?

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