Asymmetries in monetary policy reaction function and the role of uncertainties: the case of Turkey

Pelin Öge Güney

Economic Research-Ekonomska Istraživanja, 2018, vol. 31, issue 1, 1367-1381

Abstract: We analyse the effects of inflation and growth uncertainty on the monetary policy reaction function of the Central Bank Republic of Turkey (C.B.R.T.), considering possible asymmetries in the reaction function over the business cycle. We follow Bec, Salem, and Collard’s approach in order to specify an asymmetric reaction function suggesting that central banker interventions are influenced by business cycles. Our results reveal that the C.B.R.T. has asymmetric preferences. We find that the C.B.R.T. targets inflation stabilisation, both in recession and expansion periods. Moreover, the C.B.R.T. reacts more aggressively to any inflation gap during recessions than it does during expansions. On the other hand, the C.B.R.T. tries to smooth fluctuations in output, both during recessions and expansions. We further discover that the C.B.R.T. reacts to inflation and growth uncertainties more aggressively in expansion periods.

Date: 2018
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DOI: 10.1080/1331677X.2018.1481445

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