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Monetary Policy after the Global Crisis

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Abstract

Post-crisis spillovers and heightened capital flows have triggered a search for alternative monetary policy frameworks, especially for small open emerging economies. The Turkish experience since the end of 2010 is an interesting case in this respect. Faced with extreme volatility in cross-border capital flows, rapid credit growth, and a sharp deterioration in the current account deficit, the Central Bank of Turkey (CBT) has modified the conventional inflation targeting regime by adopting financial stability as a supplementary objective and enriching the set of policy instruments. This study explains the underlying motivation behind why the CBT adopted such a flexible policy, provides an overview of the new framework, and summarizes the initial results. The analysis conducted throughout the paper and the recent evidence suggests that the new policy framework has been quite effective in engineering a soft landing of the Turkish economy in the sense that it has successfully shifted the composition of aggregate demand towards a more balanced growth path (rebalancing) without prejudice to the price stability objective.

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Notes

  1. Please refer to Başçı and Kara (2011) for a more detailed exposition of this period.

  2. Needless to say, the concept of financial stability is more complex than can be captured by just capital flows, credit, and external balances. Moreover, financial stability indicators highly depend on the specific structure of the economy, and they may be time varying. For example, different indicators (like housing prices, foreign indebtedness of firms, etc.) may be more important in the future for financial stability, depending on the economic environment and/or structural changes.

  3. See Alper et al. (2012) for a detailed description of the design and implementation of reserve option mechanism.

  4. This is discussed in more detail in the next section.

  5. See Kara (2012) for the motivation of this alternative instrument.

  6. Undoubtedly, as the relationship has an internal nature, causality can be directed from the exchange rate to the interest rate as well. Nevertheless, as short term market rates are variables that are largely controlled by the CBT and the chart shows relative exchange rates, causality is highly probable to be oriented from the interest rate to the exchange rate.

  7. See Alper et al. (2012).

  8. Undoubtedly, from a general equilibrium framework, credit and the exchange rate affect inflation through other macro variables like net exports and asset prices. However, as the net effects of these channels are ambiguous, this paper focuses only on direct channels.

  9. All series are seasonally adjusted.

  10. For further information on the reasons for the breach of the inflation target, please refer to the Open Letter addressed to the Government on January 31, 2012 (http://www.tcmb.gov.tr/yeni/duyuru/2012/DUY2012-10.php).

  11. Özatay (2012), Ersel (2012), and Akkaya and Gürkaynak (2012) provide a fruitful discussion regarding the quality and design of the institutional structure.

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Authors and Affiliations

  1. Central Bank of the Republic of Turkey, Ankara, Turkey

    A. Hakan Kara

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  1. A. Hakan Kara
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Correspondence to A. Hakan Kara.

Additional information

Opinions stated herein are those of the author and do not necessarily represent the official views of the Central Bank of the Republic of Turkey. I am indebted to Eda Gülşen, Harun Alp, Koray Alper, Erdem Başçı, Koray Kalafatçılar, Hande Küçük, Çağrı Sarıkaya, Tolga Tiryaki and other colleagues at the CBRT for their valuable contributions to this paper.

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Kara, A.H. Monetary Policy after the Global Crisis. Atl Econ J 41, 51–74 (2013). https://doi.org/10.1007/s11293-012-9358-7

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