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Mitigating Turkey's trilemma trade-offs

  • Cortuk, Orcan
  • Akcelik, Yasin
  • Turhan, İbrahim

We study the trilemma conguration 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 misspecication with ACI approach and improve the specication by applying a Kalman lter 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 lter analysis has superior results. Then, our analysis continues by revealing a role for central bank foreign reserves and required reserves in mitigating the trilemma tradeos { we show that foreign reserves to GDP ratio and required reserve ratio have positive signicant impact on the residuals obtained from the trilemma regression, thus making the policy tradeos smaller.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40101.

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Date of creation: 19 Jun 2012
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Handle: RePEc:pra:mprapa:40101
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  1. 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.
  2. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2011. "Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 290-320, September.
  3. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  4. Bernardo S. de M. Carvalho & Márcio G. P. Garcia, 2006. "Ineffective Controls On Capital Inflows Under Sophisticated Financial Markets: Brazil In The Nineties," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 58, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  5. Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2008. "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time," NBER Working Papers 14533, National Bureau of Economic Research, Inc.
  6. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
  7. Agnès Bénassy-Quéré & Benoit Coeuré, 2002. "The Survival of Intermediate Exchange Rate Regimes," Working Papers 2002-07, CEPII research center.
  8. 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.
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