This article suggests a new type of reaction function fitting monetary policymaker's behaviour when constrained by a fixed exchange rate. Firstly, it incorporates new target variables, which are different from the ones commonly observed by central banks in a flexible exchange rate environment. Secondly, its time frequency is shortened in order to catch the repeated and discretionary central bank interventions for maintaining exchange rate fixity. Weekly data are therefore used for the empirical application of our formulation on Turkey between January 1997 and August 2002. The econometric analysis shows that the exchange rate constraint diverted Turkish monetary Authorities' interventions toward external variables, training unsustainable internal disequilibria.
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Find related papers by JEL classification: E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy F31 - International Economics - - International Finance - - - Foreign Exchange