What to Smooth: Rate of Interest or the Foreign Exchange? Turkish Monetary Policy under Turbulent Times

Erinc Yeldan, Kolsuz Gunes () and Unuvar Burcu ()
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Kolsuz Gunes: Department of Political Science, Bilkent University, Ankara, Turkey
Unuvar Burcu: Department of Economics, Yasar University, İzmir, Turkey

Review of Middle East Economics and Finance, 2014, vol. 10, issue 3, 247-261

Abstract: This paper studies the new monetary stance of the Central Bank of Republic of Turkey (CBRT) during the Great Recession. We note that characteristics of the post-1997 “Great Moderation” revealed interest rate smoothing as a valid policy option for the inflation targeting central banks. Utilizing econometric analysis on a general form of a Taylor Rule, we search for the relative weights of the objective function of the CBRT over Jan 2010–Dec 2013. We find that over the Great Recession, the CBRT’s focus on “interest smoothing” had been maintained; and yet the burden of adjustment fell disproportionately on the foreign exchange markets. Furthermore, weak credibility of the CBRT, lack of a simple policy rule, and noisy policy communications evidence that pre-requisites of the interest rate smoothing are not being fulfilled. Inevitable sharp policy corrections that follow smoothing periods proved insufficient against the voluminous global flows.

Keywords: inflation targeting; interest rate smoothing; monetary policy; financial stability; credibility; Turkey (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 F65 O52 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1515/rmeef-2014-0036

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