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Inflation Targeting and Exchange Rate Dynamics: Evidence From Turkey

Author

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  • K. Azim Ozdemir
  • Serkan Yigit

Abstract

This paper examines the constraints on the dynamics of the daily US dollar and the Euro exchange rates relative to the Turkish lira after the full fledged Inflation Targeting regime was adopted in 2006. We find that the single threshold specifications with two regimes that allow the conditional variance as well as the conditional mean to vary exhibit different dynamics in each regimes and produce superior forecasts below the threshold levels of the model for both the Euro and the US dollar than the forecasts produced by a random walk model. As a result, we conclude that the dynamics of the daily exchange rates are more constrained at the lower levels of the exchange rates and thereby embed a predictable process during the inflation targeting period in Turkey.

Suggested Citation

  • K. Azim Ozdemir & Serkan Yigit, 2009. "Inflation Targeting and Exchange Rate Dynamics: Evidence From Turkey," Working Papers 0901, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  • Handle: RePEc:tcb:wpaper:0901
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    File URL: http://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2009/09-01
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    Keywords

    Inflation Targeting; Exchange Rates; Target Zone; Forecasting;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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