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      Monetary policy implications of short-term capital flows in Turkey

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      Author(s)
      Dağlaroğlu, T.
      Demirel, B.
      Mahmud, S. F.
      Date
      2018
      Source Title
      Empirica
      Print ISSN
      0340-8744
      Electronic ISSN
      1573-6911
      Publisher
      Springer New York LLC
      Volume
      45
      Issue
      4
      Pages
      747 - 763
      Language
      English
      Type
      Article
      Item Usage Stats
      239
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      297
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      Abstract
      The advent of global financial crisis in 2008, unleashed volatile short term capital flows to the emerging markets. This has forced many central banks in the developing world to adopt innovative policy measures to address concerns related to financial instability caused by the volatile nature of capital flows. In 2010 Turkish Central Bank included financial stability in addition to price stability as one of primary goals of its monetary policy. Several macro-prudential measures had been taken and ‘corridor system’ of setting the short-term policy rates had been introduced. In this paper, we have estimated an extended Taylor rule, using error correction model, to examine the impact of global financial factors in impacting the setting up of the policy rate in the pre and post 2010 periods in Turkey. It has been found that in the post-2010 period, global financial factors and monetary policy stance of the core economy, USA, have become major factor(s) in shaping up the monetary policy. Particularly our results of variance decomposition show that global financial indicators such as, VIX and EMBI have taken prominence in the setting of the short-term policy rate. This has not only made the domestic monetary more dependent on external factors but has also made pro-cyclical in nature.
      Keywords
      Financial stability
      Inflation targeting
      Monetary policy
      Short-term capital flows
      Taylor rule
      Vector autoregression model
      Permalink
      http://hdl.handle.net/11693/50484
      Published Version (Please cite this version)
      https://doi.org/10.1007/s10663-017-9388-0
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      • Department of Economics 697
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