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Global Constraints on Central Banking: The Case of Turkey

Author

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  • Ahmet Benlialper

    () (Department of Economics, İpek University, Ankara, Turkey; Department of Economics, Middle East Technical University, Ankara, Turkey)

  • Hasan Cömert

    () (Department of Economics, Middle East Technical University, Ankara, Turkey)

Abstract

This study aims to evaluate the developments in Turkish monetary policy after 2002 and understand the constraints on the effectiveness of the Central Bank of the Republic of Turkey (CBRT). The CBRT has significantly altered its monetary policy in response to the crisis. It became much more experimental and aware of challenges it faced. However, the Bank’s ability to exert influence on key variables seems to have been restrained by factors outside of its control. Financial flows exert great influence on key macroeconomic variables that the Bank monitors closely. Furthermore, energy prices are among the key determinants of inflation in Turkey. As a result, the Bank’s influence on growth and inflation through intermediate variables became a daunting task. The magnitude and direction of flows seem to be mainly related to global risk perception determining the worldwide liquidity conditions rather than to domestic factors. Under these conditions central banks may not set their official interest rates independent of interest rates in advanced countries. Indeed, our VAR analysis exercise supports this argument for the Turkish case. Existing policy framework would not produce desired outcomes unless the sources of the problems such as financial flows as the main global constraints on monetary policy are addressed in a much more serious manner.

Suggested Citation

  • Ahmet Benlialper & Hasan Cömert, 2015. "Global Constraints on Central Banking: The Case of Turkey," ERC Working Papers 1512, ERC - Economic Research Center, Middle East Technical University, revised Dec 2015.
  • Handle: RePEc:met:wpaper:1513
    as

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    File URL: http://www.erc.metu.edu.tr/menu/series15/1513.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Central banking; Economic and financial crisis; Capital inflows; the Turkish economy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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