The Credibility Problem of the Central Bank of the Republic of Turkey: An Empirical Investigation

Umit Bulut

Bulletin of Economic Theory and Analysis, 2020, vol. 5, issue 2, 1-15

Abstract: Credibility gap that is defined as the difference between end-year inflation expectation and the inflation target is the main indicator to measure the credibility of a central bank that adopts the inflation targeting strategy. Within this scope, using monthly data spanning the period January 2006-April 2019, the goal of this paper is to examine whether the credibility gap of the Central Bank of the Republic of Turkey (CBRT) exhibits a mean-reverting or a random-walk behaviour. For this purpose, this paper employs unit root tests with different approximations in modelling structural breaks. The empirical findings indicate that the credibility gap of the CBRT has a unit root and demonstrates a random-walk behaviour. Put differently, the findings imply that the shocks affecting the credibility gap of the CBRT have persistence effects, meaning the CBRT has a credibility problem.

Keywords: Inflation Expectation; Credibility; Credibility Gap; The Central Bank of the Republic of Turkey; Unit Root Tests (search for similar items in EconPapers)
JEL-codes: C22 E50 E52 (search for similar items in EconPapers)
Date: 2020
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