Exchange Rate and Inflation under Weak Monetary Policy: Turkey Verifies Theory

Refet Gürkaynak, Burçin Kısacıkoğlu and Sang Seok Lee

No 9748, CESifo Working Paper Series from CESifo

Abstract: For the academic audience, this paper presents the outcome of a well-identified, large change in the monetary policy rule from the lens of a standard New Keynesian model and asks whether the model properly captures the effects. For policymakers, it presents a cautionary tale of the dismal effects of ignoring basic macroeconomics. The Turkish monetary policy experiment of the past decade, stemming from a belief of the government that higher interest rates cause higher inflation, provides an unfortunately clean exogenous variance in the policy rule. The mandate to keep rates low, and the frequent policymaker turnover orchestrated by the government to enforce this, led to the Taylor principle not being satisfied and eventually a negative coefficient on inflation in the policy rule. In such an environment, was the exchange rate still a random walk? Was inflation anchored? Does the “standard model” suffice to explain the broad contours of macroeconomic outcomes in an emerging economy with large identifying variance in the policy rule? There are no surprises for students of open-economy macroeconomics; the answers are no, no, and yes.

JEL-codes: E02 E31 E52 E58 F31 F41 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ara, nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Exchange Rate and Inflation under Weak Monetary Policy: Turkey Verifies Theory (2022)
Working Paper: Exchange rate and inflation under weak monetary policy: Turkey verifies theory (2022)
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