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Mitigating Turkey's Trilemma Tradeoffs

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  • Yasin Akcelik
  • Orcan Cortuk
  • Ibrahim M. Turhan

Abstract

We study the trilemma configuration of the Turkish economy for the period between 2002 and 2012. The paper starts by empirically testing the Mundell-Fleming theoretical concept of an \impossible trinity" (trilemma) for Turkey, following Aizenman, Chinn and Ito (ACI, 2008). This includes calculating the trilemma indices and regressing them on a constant. We show that there is a misspecification with ACI approach and improve the specification by applying a Kalman filter to the classical linear regression that enables us to capture the time-varying importance of policy decisions within the trilemma framework. By comparing the residuals of each approach, we show that Kalman filter analysis has superior results. Then, our analysis continues by revealing a role for central bank foreign reserves and required reserves in mitigating the trilemma tradeoffs { we show that foreign reserves to GDP ratio and required reserve ratio have positive significant impact on the residuals obtained from the trilemma regression, thus making the policy tradeoffs smaller.

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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1229.

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Date of creation: 2012
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Handle: RePEc:tcb:wpaper:1229

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Related research

Keywords: Trilemma; impossible trinity; required reserves; international reserves; central bank policies;

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  1. Fernandez, Roque B, 1981. "A Methodological Note on the Estimation of Time Series," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 471-76, August.
  2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  3. Michael Athans, 1974. "The Importance of Kalman Filtering Methods for Economic Systems," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 1, pages 49-64 National Bureau of Economic Research, Inc.
  4. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
  5. Agnès Bénassy-Quéré & Benoit Coeuré, 2002. "The Survival of Intermediate Exchange Rate Regimes," Working Papers 2002-07, CEPII research center.
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