Global Constraints on Central Banking: The Case of Turkey

Ahmet Benlialper and Hasan Cömert

No 1512, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: This study aims to evaluate the developments in Turkish monetary policy after 2002 and understand the constraints on the effectiveness of the Central Bank of the Republic of Turkey (CBRT). The CBRT has significantly altered its monetary policy in response to the crisis. It became much more experimental and aware of challenges it faced. However, the Bank’s ability to exert influence on key variables seems to have been restrained by factors outside of its control. Financial flows exert great influence on key macroeconomic variables that the Bank monitors closely. Furthermore, energy prices are among the key determinants of inflation in Turkey. As a result, the Bank’s influence on growth and inflation through intermediate variables became a daunting task. The magnitude and direction of flows seem to be mainly related to global risk perception determining the worldwide liquidity conditions rather than to domestic factors. Under these conditions central banks may not set their official interest rates independent of interest rates in advanced countries. Indeed, our VAR analysis exercise supports this argument for the Turkish case. Existing policy framework would not produce desired outcomes unless the sources of the problems such as financial flows as the main global constraints on monetary policy are addressed in a much more serious manner.

Keywords: Central banking; Economic and financial crisis; Capital inflows; the Turkish economy (search for similar items in EconPapers)
JEL-codes: E52 F31 F32 G01 O53 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2015-12, Revised 2015-12
New Economics Papers: this item is included in nep-ara, nep-cba, nep-cwa, nep-mac and nep-mon
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http://erc.metu.edu.tr/en/system/files/menu/series15/1513.pdf First version, 2015 (application/pdf)

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Working Paper: Global Constraints on Central Banking:The case of Turkey (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:met:wpaper:1513

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