Turkey's trilemma trade-offs
AbstractIn this paper, we study the trilemma configuration of the Turkish economy. The paper starts by empirically testing the Mundell-Fleming theoretical concept of an “impossible trinity” (trilemma) for Turkey, following the Aizenman, Chinn and Ito (ACI) approach. This includes calculating the trilemma indices and investigating their evolution over the period of 1998Q1-2010Q4, which is split into sub-samples according to the Turkey’s macroeconomic policies. We also introduce alternative empirical techniques in order to deal with possible misspecification problems detected in the ACI approach. These techniques include employing additional terms in the regression, Two Stage Least Squares and Kalman filtering. These analyses show how contributions of financial integration and monetary independence have increased from the first period to the last, with corresponding limitations on exchange rate stability. The analysis continues by exploring the implications of changes in the trilemma indices for inflation. Accordingly, it reveals evidence that trilemma indices have impacts on inflation for the period of 2003-2010. Finally, it finds that there is a key role for international reserves as trilemma trade-offs and their effects on inflation can be mitigated with their accumulation. *
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 35623.
Date of creation: Dec 2011
Date of revision:
Trilemma; exchange rate stability; monetary independence; capital openness; reserve accumulation;
Find related papers by JEL classification:
- F15 - International Economics - - Trade - - - Economic Integration
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-10 (All new papers)
- NEP-ARA-2012-01-10 (MENA - Middle East & North Africa)
- NEP-CWA-2012-01-10 (Central & Western Asia)
- NEP-MON-2012-01-10 (Monetary Economics)
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