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      What to smooth: rate of interest or the foreign exchange? Turkish monetary policy under turbulent times

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      Author(s)
      Yeldan, A. E.
      Kolsuz, G.
      Unuvar, B.
      Date
      2014-11-27
      Source Title
      Review of Middle East Economics and Finance
      Print ISSN
      1475-3685
      Electronic ISSN
      1475-3693
      Publisher
      De Gruyter
      Volume
      10
      Issue
      3
      Pages
      247 - 262
      Language
      English
      Type
      Article
      Item Usage Stats
      177
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      Abstract
      This paper studies the new monetary stance of the Central Bank of Republic of Turkey (CBRT) during the Great Recession. We note that characteristics of the post-1997 “great moderation” revealed interest rate smoothing as a valid policy option for the inflation targeting central banks. Utilizing econometric analyses on a general form of a Taylor Rule, we search for the relative weights of the objective function of the CBRT over Jan 2010 – Dec 2013. We find that over the great recession, the CBRT’s focus on “interest smoothing” had been maintained; and yet the burden of adjustment fell disproportionately on the foreign exchange markets. Furthermore, weak credibility of the CBRT, lack of a simple policy rule, and noisy policy communications evidence that pre-requisites of the interest rate smoothing are not being fulfilled. Inevitable sharp policy corrections that follow smoothing periods prove insufficient against the voluminous global flows.
      Keywords
      Interest rate smoothing
      Inflation targeting
      Turkey
      Financial stability
      Credibility
      Monetary policy
      Permalink
      http://hdl.handle.net/11693/12418
      Published Version (Please cite this version)
      http://dx.doi.org/10.1515/rmeef-2014-0036
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      • Department of Economics 697
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