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Inflation Targeting According to Oil and Exchange Rate Shocks

Cem Mehmet Baydur

Istanbul Stock Exchange Review, 2008, vol. 10, issue 38, 43-62

Abstract: Unless current output is not equal to potential output in an economy, inflation targeting cannot be zero. The minimum rate of inflation target is determined by the level of economic distortion rate. Briefly, economic distortion can be defined as all kind of events and regulations that reduces the efficiency of price mechanism. While shocks are included to the analysis of inflation targeting with distortions, the central bank is compelled to make a choice between inflation and output stability. If the shocks are permanent, they cause serious economic distortions. Under these circumstances, central bank has to revise its inflation target. The main purpose of this work is to analyze how exchange rate and oil shocks affect inflation and how these shocks affect the inflation targeting in the Turkish economy. The econometric determinations of this work emphasize that exchange rate shocks affect inflation target positively in the long run. On the other hand, petrol shocks will lead The Central Bank of the Republic of Turkey to revise its inflation targets.

Keywords: Inflation targeting; Shocks; Output Gap. (search for similar items in EconPapers)
Date: 2008
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