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Quantitative Assessment of Inflation Pressure during a Transition to Inflation Targeting

Author

Listed:
  • Halit Aktürk

    (Meliksah University, Department of Economics, Kayseri, Turkey)

  • Diana N. Weymark

    (Vanderbilt University, Department of Economics, Nashville, TN, USA)

Abstract

This study provides a detailed quantitative analysis of a transition to inflation targeting with a focus on the role of expectations. We investigate the impact of the Turkish central bank’s inflation reduction programs on inflation in Turkey from 1996 to 2005. Over this period there was a transition from non-targeting to semi-formal targeting, and then, finally, to full-fledged inflation targeting. In order to analyze the effectiveness of Turkish monetary policy quantitatively, a structural model of the Turkish economy that allows for structural breaks is estimated under the alternative assumptions of rational expectations and adaptive learning. Using these estimates, counterfactual experiments are conducted to obtain ex ante and ex post inflation pressure measures which characterize, respectively, the pre-policy and post-policy inflationary environment. To evaluate the impact of the central bank’s disinflation program on its credibility, we introduce an index of monetary policy credibility that is new to the literature. The inflation pressure indices indicate that there was no significant difference between the inflationary environments in the 2002-2005 periods as compared to the 1996-2001 periods. However, the monetary policy effectiveness index shows that the semi-formal inflation targeting program that was implemented from 2002-2005 was considerably more successful in reducing inflation than the policies in the previous period had been. Surprisingly, the index of monetary policy credibility suggests that the improvement in inflation control was not accompanied by a significant improvement in the central bank’s credibility.

Suggested Citation

  • Halit Aktürk & Diana N. Weymark, 2013. "Quantitative Assessment of Inflation Pressure during a Transition to Inflation Targeting," EY International Congress on Economics I (EYC2013), October 24-25, 2013, Ankara, Turkey 246, Ekonomik Yaklasim Association.
  • Handle: RePEc:eyd:cp2013:246
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    Keywords

    inflation pressure; transition; counterfactual; monetary policy;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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