An Assessment of Monetary Policy Implemented in Turkey within the Framework of Taylor Rule

Ayberk Nuri Berkman

Abstract


The debate, which served as a manifestation of the contradictive impacts of monetary policy, on “rules versus discretion” in monetary policy is intensified especially after the crisis of stagflation in the mid-1970s. Taylor Rule, that refers to interest rate policy as a function of inflation deviations and the output gap, can be thought of as a harmonized state of politics according to “rules and discretion.” Within the framework of the discussions on whether monetary policies should be carried out in compliance with either rules or discretion, it has become even more important since many countries have adopted anti-inflationary policies by the 1980s. In this study, monetary policies of Central Bank of Turkey (CBRT) between 2001-2016 are evaluated by using the framework of Taylor Rule along with monthly data. First of all, Taylor Rule interest rate is found to be higher than the current interest rate level. Secondly, traditional Taylor Rule model and extended Taylor Rule model with and without backward-looking expectations are estimated. In both models, it is found that CBRT reacts to inflation gap according to the framework of Taylor Rule. However, the output gap’s coefficients in each model are found to be insignificant. The exchange rate coefficient is positive in contrast to the former studies in the literature. Furthermore, no important difference is detected between the models with and without backward-looking expectations.


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