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Inflation targeting and the exchange rate: Does it matter in Turkey?

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  • Civcir, Irfan
  • Akçaglayan, AnIl

Abstract

This paper investigates the monetary policy reaction functions of the Central Bank of Republic of Turkey (CBRT) over the periods 1987:01-2001:12 and 2002:01-2009:05. We specifically attempt to shed light on question to what extent exchange rate developments still continue to influence monetary policy, even under inflation targeting. This study seeks to investigate how the monetary policy responded to the exchange rate shocks before and after adoption of inflation targeting regime. How large the effect of exchange rate shocks is accounted for in forecast error variances decompositions for monetary policy as compared to other shocks? Using the VAR model, this study shows that there has been strong pass-through during whole period. Moreover, in the postcrisis period, exchange rate has been the main reaction variable for the CBRT.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 32 (2010)
Issue (Month): 3 (May)
Pages: 339-354

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Handle: RePEc:eee:jpolmo:v:32:y::i:3:p:339-354

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Web page: http://www.elsevier.com/locate/inca/505735

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Keywords: Inflation targeting Exchange rates Taylor rule Turkey Monetary policy Reaction function;

References

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  1. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
  2. Nejla Adanur Aklan & Mehmet Nargelecekenler, 2008. "Taylor Rule in Practice: Evidence from Turkey," International Advances in Economic Research, Springer, vol. 14(2), pages 156-166, May.
  3. Bofinger, Peter, 2001. "Monetary Policy: Goals, Institutions, Strategies, and Instruments," OUP Catalogue, Oxford University Press, number 9780199248568, September.
  4. M. Ege Yazgan & Hakan Yilmazkuday, 2007. "Monetary policy rules in practice: evidence from Turkey and Israel," Applied Financial Economics, Taylor & Francis Journals, vol. 17(1), pages 1-8.
  5. Vuslat Us, 2007. "Alternative Monetary Policy Rules in the Turkish Economy Under an Inflation-Targeting Framework," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 43(2), pages 82-101, April.
  6. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  7. Hakan Berument & Kamuran Malatyali, 2000. "The implicit reaction function of the Central Bank of the Republic of Turkey," Applied Economics Letters, Taylor & Francis Journals, vol. 7(7), pages 425-430.
  8. Hakan Berument & Hakan Tasci, 2003. "Monetary Policy Rules in Practice : Evidence from Turkey," Departmental Working Papers 0305, Bilkent University, Department of Economics.
  9. repec:fth:bfdipa:11/2000 is not listed on IDEAS
  10. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  11. Us, Vuslat, 2004. "Inflation dynamics and monetary policy strategy: some prospects for the Turkish economy," Journal of Policy Modeling, Elsevier, vol. 26(8-9), pages 1003-1013, December.
  12. Mayes, David G & Virén, Matti, 2000. "Asymmetry and the Problem of Aggregation in the Euro Area," Research Discussion Papers 11/2000, Bank of Finland.
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Citations

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Cited by:
  1. Yilmazkuday, Hakan, 2011. "Monetary policy and credit cards: Evidence from a small open economy," Economic Modelling, Elsevier, vol. 28(1), pages 201-210.
  2. Kaya, Huseyin, 2013. "Forecasting the yield curve and the role of macroeconomic information in Turkey," Economic Modelling, Elsevier, vol. 33(C), pages 1-7.
  3. Varella Mollick, Andre & Torres, Rene Cabral & Carneiro, Francisco G., 2008. "Does Inflation Targeting Matter for Output Growth? Evidence from Industrial and Emerging Economies," Policy Research Working Paper Series 4791, The World Bank.
  4. Beirne, John & Bijsterbosch, Martin, 2011. "Exchange rate pass-through in central and eastern European EU Member States," Journal of Policy Modeling, Elsevier, vol. 33(2), pages 241-254, March.
  5. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
  6. Kaya, Huseyin, 2013. "The yield curve and the macroeconomy: Evidence from Turkey," Economic Modelling, Elsevier, vol. 32(C), pages 100-107.
  7. Abo-Zaid, Salem & Tuzemen, Didem, 2012. "Inflation Targeting: A three-decade perspective," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 621-645.

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