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The Monetary Policy Reaction Function in Turkey: Evidence from Fourier-Based Time Series Methods

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  • Ümit BULUT

    (Kırşehir Ahi Evran University, Faculty of Economics and Administrative Sciences, Department of Economics, Kırşehir, Turkey)

Abstract

The Central Bank of the Republic of Turkey (CBRT), which adopted an inflation targeting strategy in 2006, has thus far typically missed the inflation target. Therefore, this paper focuses on the monetary policy reaction function of the CBRT to detect the economic indicators that the CBRT considers while it is adjusting short-term interest rates. Put differently, the goal of this paper is to estimate a forward-looking monetary policy reaction function for the CBRT. To that end, the paper uses monthly data over the period 2006:1-2019:5. Differing from the previous papers in the empirical literature, this paper considers recent developments in time series analysis and employs time series methods based on the Fourier approximation to capture structural breaks. These methods are capable of presenting efficient and unbiased results in the presence of both sharp and gradual breaks. The findings indicate that the CBRT considers only inflation while it is steering short-term interest rates.

Suggested Citation

  • Ümit BULUT, 2019. "The Monetary Policy Reaction Function in Turkey: Evidence from Fourier-Based Time Series Methods," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 69(2), pages 159-173, December.
    • Handle: RePEc:ist:journl:v:69:y:2019:i:2:p:159-173
    DOI: 10.26650/ISTJECON2019-0024
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary policy reaction function; the Central Bank of the Republic of Turkey; time series methods based on the Fourier approximation;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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