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

Date
2014-11-27
Authors
Yeldan, A. E.
Kolsuz, G.
Unuvar, B.
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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
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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.

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Keywords
Interest rate smoothing, Inflation targeting, Turkey, Financial stability, Credibility, Monetary policy
Citation
Published Version (Please cite this version)