Three essays on inflation and monetary policy in Turkey

Abstract

This dissertation analyzes three studies on inflation dynamics and monetary policy alternatives in Turkey. In the first article, inflation inertia is analyzed. To this aim, expectations are assumed to be formed optimal univariate in a staggared contracts model setting,. An alternative assumption, which then would be subject to Lucas critique, is that expectations are naive. Consequently, the analysis favors the first alternative to the latter one in explaining high and persistent inflation. In the second study, the degree of currency substitution is analyzed by using various definitions. More specifically, ratchet effect in currency substitution is studied by Autoregressive distributed lag (ADL) procedure. The statistical evidence suggests that even though currency substitution has been persistent at an increasing degree, the economy at large has not been irreversibly dollarized yet. The final study of this dissertation discusses monetary transmission mechanism in a small structural model setting. In this framework, using various simulations the implementation of a standard Taylor Rule is analyzed. The alternative proposal is the use a monetary conditions index as a policy rule. The results show that the second alternative is preferable since the economy is then exposed to lessened volatility.