Simultaneous Monetary Policies in the Context of the Trilemma: Evidence from the Central Bank of Turkey

Yasin Kursat Onder () and Mauricio Villamizar-Villegas

No 13203, Borradores de Economia from Banco de la Republica

Abstract: Many central banks that have opted for monetary autonomy have also been reluctant to relinquish control over the value of their currencies. As a result, they have operated through both interest rate and foreign exchange interventions. However, in the context of the monetary trilemma, both effects can potentially offset each other. Using daily data from the Central Bank of Turkey during the period of 2002 - 2010, we study the effects of simultaneous policies by first purging the intended monetary decisions from responses to real-time macroeconomic variables, and then determining their impact on economic activity. We find that the Central Bank of Turkey adjusted its policy rate mostly in response to inflation levels relative to both the yearly target and agents’ expectations, and conducted purchases and sales of foreign currency in response to exchange rate behavior. These responses varied depending on whether interventions were pre-announced. We also find that unannounced purchases of foreign currency had a significant effect in reducing exchange rate volatility but appeared to have no effect on exchange rate changes. On the other hand, changes in the policy rate significantly affected inflation but had no discernible effect on output growth.

Keywords: Central bank intervention; simultaneous policies; monetary shocks; price puzzle; monetary policy trilemma; foreign exchange intervention (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 F31 (search for similar items in EconPapers)
Pages: 31
Date: 2015-07-03
New Economics Papers: this item is included in nep-ara, nep-cba, nep-cwa, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The Effects of Monetary and Exchange Rate Policy Shocks: Evidence from an Emerging Market Economy (2018)
Working Paper: Simultaneous Monetary Policies in the Context of the Trilemma: Evidence from the Central Bank of Turkey (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000094:013203

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