HAVE FINANCIAL STABILITY CONCERNS CHANGED THE PRIORITY OF THE CENTRAL BANK OF THE REPUBLIC OF TURKEY?

Ekrem Erdem, Umit Bulut and Emrah Koçak
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Ekrem Erdem: Erciyes University, Turkey

Studies in Business and Economics, 2017, vol. 12, issue 2, 35-45

Abstract: This paper aims at analysing whether the Central Bank of the Republic of Turkey (CBRT), designing a new monetary policy framework to achieve financial stability in the last quarter of 2010, tries to pursue financial stability by putting price stability on the back burner. To this end, a forward-looking reaction function that is extended with nominal exchange rate gap and nominal domestic credits gap is estimated for the CBRT. The paper first performs unit root and cointegration tests and finds that the variables become stationary at first differences and that there is a cointegration relationship among variables. Then, the paper conducts the Kalman filter to obtain time varying parameters. The findings show that the coefficients of all explanatory variables did not change too much after the new monetary policy framework of the CBRT in the last quarter of 2010. Therefore, this paper asserts that the CBRT continues to pursue price stability as its primary goal and tries to achieve financial stability by using macroprudential tools. Thus this paper concludes that financial stability concerns have not changed the priority of the CBRT.

Keywords: The Central Bank of the Republic of Turkey; macroprudential policy; Kalman filter; time varying parameter (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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