The role of exchange rate in inflation targeting: the case of Turkey

Özdemir M.

APPLIED ECONOMICS, vol.52, pp.3138-3152, 2020 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 52
  • Publication Date: 2020
  • Doi Number: 10.1080/00036846.2019.1706717
  • Journal Name: APPLIED ECONOMICS
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus, IBZ Online, International Bibliography of Social Sciences, ABI/INFORM, Business Source Elite, Business Source Premier, CAB Abstracts, EconLit, Geobase, Index Islamicus, Public Affairs Index, Veterinary Science Database
  • Page Numbers: pp.3138-3152
  • Keywords: Inflation targeting, exchange rate, monetary policy, emerging markets, threshold models, MONETARY-POLICY RULES, TAYLOR RULES, UNIT-ROOT, CENTRAL BANKING, TIME-SERIES, FRAMEWORK, COUNTRIES, REGIMES
  • Bursa Uludag University Affiliated: Yes

Abstract

The role of the exchange rates in emerging market economies that have adopted inflation targeting (IT) is a critical and contentious issue in the relevant literature. This article investigates whether an exchange rate-augmented Taylor rule describes the Central Bank of Republic of Turkey's (CBRT) monetary policy. Covering the period from 2002:1 to 2017:8 it also explores possible nonlinearities in the reaction function of the CBRT by employing a Threshold Vector Autoregressive (TVAR) model. The linear estimation of the model highlighted the importance of the exchange rate in monetary policy under IT. The results of the nonlinear model indicate that the stance of monetary policy was asymmetric with respect to exchange rate movements during the conventional IT period. However, the asymmetric monetary policy stance disappeared in the aftermath of the Global Financial Crisis. Increasing considerations of financial stability undermined the asymmetric policy stance of the CBRT in the post-crisis period.