Expectations, Communication and Monetary Policy in Turkey
AbstractThis study analyzes the behavioral aspects of inflation expectations in Turkey by utilizing data from a panel of survey respondents, and draws implications for the formulation of monetary policy and communication strategy. Our results lend support to the view that the survey respondents take the inflation targets and the official forecasts of the Central Bank of Turkey into account in forming their expectations. We show that inflation expectations during the rapid disinflation episode of 2002-2005 were firmly anchored by the announced targets. Yet, the weight attached to past inflation and the sensitivity of inflation expectations to variables such as exchange rates and the risk premia seem to have increased in recent years. We also show that there is significant heterogeneity in the expectation formation process. Real sector attaches a greater weight to past inflation than the financial sector, suggesting that more effort should be devoted to communicating quantitative policy objectives to the real sector. Moreover, the financial sector appears to be relatively more sensitive to variations in volatile variables such as exchange rates, risk premium and short-term inflation surprises, implying that communication to financial markets should keep emphasizing the medium-term policy perspective of the monetary policy.
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Bibliographic InfoPaper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0801.
Date of creation: 2008
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-14 (All new papers)
- NEP-CBA-2008-08-14 (Central Banking)
- NEP-CWA-2008-08-14 (Central & Western Asia)
- NEP-MAC-2008-08-14 (Macroeconomics)
- NEP-MON-2008-08-14 (Monetary Economics)
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