How NOT to Conduct Monetary Policy: The Case of Turkiye

Taher E. Fahmi
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Taher E. Fahmi: University of Warwick

Warwick-Monash Economics Student Papers from Warwick Monash Economics Student Papers

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

Keywords: Unorthodox MonetaryPolicy; Markov-Switching DSGE model; Bayesian Estimation; Turkiye JEL classifications: C11; C63; E31; E32; E52 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:wrkesp:95

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