A study about the monetary policy rule of the Central Bank of the Republic of Turkey in the implicit inflation targeting framework

Abstract

The gist of the study presented in this thesis is to provide an answer mainly to two questions: First; whether in the last four years the Central Bank of the Republic of Turkey (CBRT or Central Bank) has followed a monetary policy rule consistent with its commitments about price stability objectives, implicit inflation targeting regime and floating exchange rate. Second one is if it has done to what extend this rule has resembled the original Taylor rule. In the study, to investigate the answer to these questions a backward-looking model for a monetary policy rule is described and is subjected to an econometric estimation process. It yields significant results for the interval between 2001 and 2005. In a summary, the findings support that while after 2001 the rate of inflation has continued to be a dominant indicator to which the CBRT reacted consistent with its commitments, coming to the current years the real exchange rate (RER) movements and current account deficits have gained an increasing significance in monetary policy rule. Hence, the thesis argues that instead of being tied to a simple Taylor rule, the CBRT might have adopted a differentiated policy rule where it has concerned RER and current account deficit beside the rate of inflation.