MONETARY POLICY TRILEMMA, INFLATION TARGETING AND GLOBAL FINANCIAL CRISIS

Eda Gülşen (eda.gulsen@tcmb.gov.tr) and Erdal Özmen (ozmen@metu.edu.tr)
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Eda Gülşen: Central Bank of the Republic of Turkey, Research Department, Ankara, Turkey
Erdal Özmen: Middle East Technical University, Department of Economics, Ankara, Turkey

No 1714, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: We empirically investigate the validity of the monetary policy trilemma postulation for emerging market (EME) and advanced (AE) economies under different exchange rate and monetary policy regimes before and after the recent global financial crisis (GFC). Consistent with the dilemma proposition, domestic interest rates are determined by global financial conditions and the FED rate even under floating exchange rate regimes (ERR) in the long-run. The impact of the FED rates is higher in EME than AE and EME are much more sensitive to global financial cycle under managed than floating ERR. The spillover from the FED rate substantially increases after the GFC in EME with floating ERR and AE. The results from the monetary policy reaction functions based on equilibrium correction mechanism specifications suggest that domestic interest rates respond to inflation and output gaps especially under inflation targeting (IT) in the short-run. The response to inflation gap tends to be smaller in IT AE after the GFC.

Keywords: Exchange rate regimes; Global financial crisis; Inflation targeting; Monetary policy; Policy trilemma (search for similar items in EconPapers)
JEL-codes: E50 E52 F30 F33 F42 F65 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2017-11, Revised 2017-11
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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