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On the potential and Limitations of monetary policy in Turkey

Author

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  • Ilker Domac
  • Gultekin Isiklar
  • Magda Kandil

Abstract

The use of monetary policy to stimulate economic activity around the globe and in Turkey has been receiving a flurry of attention. Calls for lower interest rates have become louder as the country’s private driven growth has slowed down. However, monetary policy faces the challenges of maintaining external stability and reviving domestic conditions, which could necessitate conflicting interest rate policies. To determine which goals are most suitable for monetary policy, one must understand the effects of monetary policy and its transmission channels to the macro economy. Our empirical results suggest that monetary policy in Turkey has fairly limited power to affect output growth, even in the short-run. We find that external factors – such as shocks to risk aversion and global growth – have a much stronger impact on economic activity in Turkey. These results seem to be in line with the strand of the literature, which highlights the importance of global financial cycles and argues that exchange rate flexibility alone is not enough to guarantee monetary autonomy in a world of large capital flows. Consequently, our empirical findings corroborate the notion that monetary policy should focus on its overriding objective of price stability, given Turkey’s greater exposure to supply shocks and pro-cyclicality of international finance.

Suggested Citation

  • Ilker Domac & Gultekin Isiklar & Magda Kandil, 2019. "On the potential and Limitations of monetary policy in Turkey," Middle East Development Journal, Taylor & Francis Journals, vol. 11(2), pages 231-249, July.
  • Handle: RePEc:taf:rmdjxx:v:11:y:2019:i:2:p:231-249
    DOI: 10.1080/17938120.2019.1664838
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