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Monetary transmission mechanism in Turkey under the monetary conditions index: an alternative policy rule

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Abstract

This study analyses monetary transmission mechanism in Turkey using a small structural macroeconomic model. The core equations of the model consist of aggregate demand, wage-price setting, uncovered interest rate parity, foreign sector and a monetary policy rule. The aim of the paper is to analyse the disinflation path, the output gap, the output level, the exchange rate and the interest rate, and also the output-inflation variance frontier of the economy under various scenarios. The first scenario assumes that a standard Taylor rule is implemented as the policy rule. In the alternative scenario, instead of the standard Taylor rule, the MCI, Monetary Conditions Index - combination of the changes in the short-term real interest rate and in the real effective exchange rate in a single variable - is used as a policy instrument. The results indicate that the economy stabilizes much more quickly and shows significantly less volatility under this new setting. Therefore, the paper concludes that the policymakers should consider using MCI as an instrument when conducting monetary policy.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 36 (2004)
Issue (Month): 9 ()
Pages: 967-976

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Handle: RePEc:taf:applec:v:36:y:2004:i:9:p:967-976

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  1. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  2. Gerlach, Stefan & Smets, Frank, 2000. "MCIs and monetary policy," European Economic Review, Elsevier, vol. 44(9), pages 1677-1700, October.
  3. Clarida, R. & Gertler, M., 1996. "How the Bundesbank Conducts Monetary Policy," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-14, C.V. Starr Center for Applied Economics, New York University.
  4. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers, C.V. Starr Center for Applied Economics, New York University 97-32, C.V. Starr Center for Applied Economics, New York University.
  5. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  6. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  8. Mehtap Kesriyeli & Cihan Yalcin, 1998. "Taylor Kurali ve Turkiye Uygulamasi Uzerine Bir Not," Discussion Papers, Research and Monetary Policy Department, Central Bank of the Republic of Turkey 9802, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  9. Mehtap Kesriyeli & I.Ilhan Kocaker, 1999. "Monetary Conditions Index : A Monetary Policy Indicator For Turkey," Discussion Papers, Research and Monetary Policy Department, Central Bank of the Republic of Turkey 9908, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
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Cited by:
  1. Mustafa Kilinc & Cengiz Tunc, 2014. "Identification of Monetary Policy Shocks in Turkey: A Structural VAR Approach," Working Papers 1423, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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