What to smooth: rate of interest or the foreign exchange? Turkish monetary policy under turbulent times
Date
2014-11-27Source 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
ArticleItem Usage Stats
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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 smoothingInflation targeting
Turkey
Financial stability
Credibility
Monetary policy