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How NOT to Conduct Monetary Policy : The Case of Turkiye

Author

Listed:
  • Fahmi, Taher E.

    (University of Warwick)

Abstract

This work quantifies the welfare cost of unorthodox monetary policy conduct in Turkiye during 2021-2023 through a counterfactual experiment based on an estimated Markov-switching DSGE (MS-DSGE) model. This episode marks a sharp departure fromHow NOT to Conduct Monetary Policy : The Case of Turkiye conventional, inflation-stabilizing policy despite rising inflation, providing an ideal setting for evaluating welfare losses caused by politically driven departures from or thodoxy. The analysis uses quarterly data from 2006Q1 to 2025Q1 and specifies four candidate models, three of which allow for regime-switching in Taylor rule parameters and shock volatilities. Estimation results indicate that the model with the best fit is one with switching in the inflation-response and interest-rate smoothing parameters, alongside volatility switching in cost-push shocks. Using the best fitting model, the counterfactual experiment estimates welfare gains of 155–177% had the central bank refrained from unorthodoxy during said episode

Suggested Citation

  • Fahmi, Taher E., 2026. "How NOT to Conduct Monetary Policy : The Case of Turkiye," Warwick-Monash Economics Student Papers 95, Warwick Monash Economics Student Papers.
    • Handle: RePEc:wrk:wrkesp:95
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/wmesp/manage/95-fahmi.pdf
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    References listed on IDEAS

    as
    1. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
    2. Thorbecke, Willem & Sengonul, Ahmet, 2023. "The impact of exchange rates on Turkish imports and exports," International Economics, Elsevier, vol. 174(C), pages 231-249.
    3. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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