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Monetary Policy in Turkey After the Global Crisis

  • A. Hakan Kara

Post-crisis spillovers and heightened capital flows have triggered a search for alternative monetary policy frameworks, especially for small open emerging economies. The Turkish experience since end-2010 sets out an interesting case in this respect. Faced with extreme volatility in cross-border capital flows, rapid credit growth and a sharp deterioration in the current account deficit, Central Bank of Turkey (CBT) has modified the conventional inflation targeting regime by adopting financial stability as a supplementary objective and enriching the set of policy instruments with a particular emphasis on credit and exchange rate channels. This study explains the underlying motivation why the CBT has adopted such a flexible policy, provides an overview of the new framework, and summarizes the initial results. The analysis conducted throughout the paper and the recent evidence suggests that the new policy framework has been quite effective in reducing the macro financial risks related to a sudden reversal of capital flows by engineering a “soft landing” of the Turkish economy. The policy has successfully shifted the composition of aggregate demand towards a more balanced growth path (rebalancing) without prejudice to the price stability objective.

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Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1217.

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Date of creation: 2012
Date of revision:
Handle: RePEc:tcb:wpaper:1217
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  1. Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," NBER Working Papers 16377, National Bureau of Economic Research, Inc.
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  10. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-61, April.
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