Assessing monetary policy rule in Turkey

Abstract

The aim of this paper is to investigate monetary policy efficiency in Turkey from the period of 2002 to 2008. During this period, the Central Bank of the Republic of Turkey followed important actions and applied the policy process more efficiently. Additionally, step-by-step, implication of inflation targeting regime improved the efficiency of policy instruments. This study derives Taylor and McCallum's optimal policy rule for Turkey and compares them with Turkish Central Bank's actions during the analyzed period. Unlike to previous studies, we tested the sensitivity of policy rules to implication of different filtering methods. The study used Hodrick-Prescott (1997), Baxter-King (1995) and Unobserved Components Models. The study found that high volatility might create different results for optimal policy rules. Empirical findings show that comparing Taylor and McCallum's approaches, the Central Bank of Turkey's decisions are more close to the Taylor's rule only during the second phase of inflation targeting regime. Also, it indicates that, the first phase of inflation targeting regime created sound ground for fully implementation of inflation targeting regime. Pattern of the Central Bank of Turkey's policy is very close to the basic McCallum rule during the whole observed period