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Turkey’ Trilemma Trade-offs: Is there a role for reserves?

  • Orcan ÇÖRTÜK

    (Merkez Bankası)

  • Nirvikar SINGH

    (University of California Santa Cruz)

In this paper, we empirically investigate the Mundell-Fleming theoretical concept of an “impossible trinity” (trilemma) for Turkey, following the Aizenman, Chinn and Ito approach. However, we also introduce alternative empirical techniques in order to deal with possible misspecification problems that we detect in the mentioned approach. Accordingly, we show that financial integration and monetary independence have increased from late 1990s to 2010, with corresponding limitations on exchange rate stability. Our analysis continues by exploring the implications of changes in the trilemma indices for inflation in a regression in which we find that trilemma indices have certain impact on inflation. Finally by introducing international reserves (as a percentage of GDP) to the equation, we also attain role for international reserves on decreasing inflation conditional upon it is above a certain threshold.

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Article provided by Bilgesel Yayincilik in its journal İktisat İşletme ve Finans.

Volume (Year): 28 (2013)
Issue (Month): 328 ()
Pages: 67-88

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Handle: RePEc:iif:iifjrn:v:28:y:2013:i:328:p:67-88
Contact details of provider: Web page: http://iif.com.tr
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  1. Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2010. "Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma," NBER Working Papers 15876, National Bureau of Economic Research, Inc.
  2. Michael Hutchison & Rajeswari Sengupta & Nirvikar Singh, 2012. "India’s Trilemma: Financial Liberalisation, Exchange Rates and Monetary Policy," The World Economy, Wiley Blackwell, vol. 35(1), pages 3-18, 01.
  3. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
  4. Nooman Rebei & Hafedh Bouakez, 2004. "Why Does Private Consumption Rise After a Government Spending Shock?," Econometric Society 2004 North American Summer Meetings 417, Econometric Society.
  5. Aizenman, Joshua & Chinn, Menzie David & Ito, Hiro, 2009. "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time," Santa Cruz Department of Economics, Working Paper Series qt840728sc, Department of Economics, UC Santa Cruz.
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